Fund Complex M&As Do Not Necessarily Lead to Growth
March 31, 2003
Margin pressures may hasten the pace of consolidation in the fund industry, indicates a report from Lipper of New York, issued last week.
Many fund companies have opted to hasten the pace of growth by buying other companies, but that strategy may not pay off, according to an earlier report, from Cerulli Associates of Boston.
"Targeted Perspective: M&A in Global Asset Management 2003" is the company's third-annual look at how fund companies fare after acquisition. Cerulli measured growth by assets under management for the year ending 2001, scrutinizing 70 companies out of 400 that have been acquired in the previous eight years. More often than not, 54% of the time, the growth of acquired firms lagged behind that of their peers.
Ben Phillips, managing director at Cerulli, admitted that the methodology is not a perfect measure of success, but "assets under management (AUM) are the most transparent" measure that the company can use. In fact, obtaining AUM is hard enough, much less revenue and profitability results, Phillips said.
Merging the servicing and back-office operations of two fund families alone can often drive down costs enough to justify a merger, he said. Nevertheless, increasing assets under management is typically a good benchmark of overall financial success, Phillips added. Cutting costs is typically easier than boosting AUM, he said. "Making the firm stronger as an asset gatherer is where the stumbling block takes place," he said.
Cerulli concluded that organic growth is the best method of accumulating assets. For the eight years ending December 2001, firms that relied on organic growth increased assets by an average of 17%, well over the industry average of 11%.
However, not all companies with an acquisition strategy would agree with Cerulli's conclusion. "I would say it's really case by case, and it comes down to the distribution firepower of the acquirer," said Bruce Ventimiglia, chairman, president and CEO at recently merged Orbitex-Saratoga Capital Management of Garden City, NY.
Orbitex and Saratoga, both relatively small fund families, merged for that very reason, as Orbitex had distribution among wirehouses and Saratoga concentrated among regional broker/dealers and banks. In addition to distribution gains, the companies also meshed in terms of investment expertise, Ventimiglia said. Orbitex featured sector funds while Saratoga had more traditional core offerings.
Similarly, fund acquisitions at Amvescap have focused on complementary investment expertise rather than sheer asset accumulation, said Bill Hensel, a spokesman for the Atlanta-based firm. By adding the value fund lineup of Canadian fund company Trimark to its existing AIM funds, Amvescap is "now the third-largest fund company in Canada," Hensel said. The company also ranked No. 1 in sales in 2002, he added.
In the U.K., the acquisition of value manager Perpetual created the Invesco Perpetual brand for Amvescap, which is now the second-largest retail brand in the country. Invesco Perpetual also led its peers in new sales through the third quarter of 2002. Hensel said that the expansion of the fund lineup helped the company across the board and certainly accelerated growth at the acquired firms.
Phillips agreed that acquisition was not necessarily a strategic faux pas. As he sees it, acquirers that preserve the original brands of funds fare best. In part, this is because of inertia from pre-existing marketing efforts, but there is a more abstract component that appears to affect success, which is simply letting people go about their business.
"Keeping out of the target firm's hair and letting them keep their attractive business strategy really helps in terms of asset gathering," he said.
In fact, the acquisition trend is leaning towards co-branding strategies, rather than ones structured to simply absorb assets, Phillips said. Consciousness of this and other integration issues has led to improvements in the growth of acquired companies. Cerulli's data shows that while acquired companies still lag behind their peers, the numbers have improved year over year. In 2000, 67% of target firms failed Cerulli's growth test, whereas 72% failed in 1999.
The changing trends in acquisitions has a lot to do with the realization that maintaining a fund company may constitute more of a distraction than a profit center for some companies. During mutual funds' growth in the '90s, having a proprietary fund family was all the rage. Now, it can be more of a white elephant. Such thinking inspired German bank Commerzbank to sell the Montgomery Funds to Wells Fargo of San Francisco.