Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

Amvescap's Power Play for PowerShares: Blends AIM's Distribution Muscle With Unique ETF Lineup

Last week, Amvescap of London and Atlanta announced it would purchase PowerShares Capital Management of Wheaton, Ill., sponsor of 36 exchange-traded funds, for an initial purchase price of $60 million in cash plus additional contingency payments of cash and/or stock over the next five years. The financial structure of the acquisition agreement could push the merger deal to as much as $730 million and largely depends on the growth of assets under management, an Amvescap spokesman said. The maximum amount could be earned by PowerShares principals if assets reach $125 billion.

The deal, which will expand the investment offerings of Amvescap's subsidiary AIM Investments of Houston, as well as significantly bolster the distribution of PowerShares' ETFs, is expected to close in the first or second quarter of 2006. Executives at PowerShares, including President and CEO Bruce Bond, are expected to continue for the foreseeable future.

PowerShares' family of 36 ETFs with a combined $3.5 billion will be added to AIM's existing lineup of 64 retail mutual funds, 12 institutional funds, 32 sub-advised funds, plus an assortment of private client and separately managed accounts. All told, AIM sported $129 billion in combined assets under management as of Sept. 30, 2005.

AIM's wholesalers are expected to begin offering the complementary ETF products to financial advisers later this year, many of whom utilize fee-based platform programs, confirmed Gene Needles, president and CEO of AIM Distributors at a press conference. "This is just one more solution we can bring to the marketplace," he said.

Of particular interest is getting the PowerShares ETFs included in retirement plans, an area in which ETFs have not had great penetration, said Mark Williamson, president and CEO of AIM. A decision as to whether to co-brand the PowerShares ETFs with either AIM or Amvescap has not yet been made.

The addition of the PowerShares' suite of ETFs is a natural extension of Amvescap's capabilities, and complements AIM's breadth of actively managed mutual funds, said Marty Flanagan, CEO of Amvescap. "This puts us in a very important and leading position in the marketplace that no one [else] has offered," he added.

PowerShares isn't the largest ETF sponsor by asset size. In fact, it's in fourth place behind ETF leader Barclays Global Advisors, which sports a lineup of 102 ETFs with $179 billion under management. State Street Global Advisors and Vanguard are also formidable ETF sponsors.

But PowerShares is one of the most aggressive in terms of seeking to quickly bulk up with vast product offerings. It made its first foray into the ETF marketplace in May 2003 with two ETFs, and now offers a broad array of innovative and niche ETFs that track specific, custom-crafted market indexes created by outside firms or stock exchanges. It is also the first to offer an ETF that provides exposure to the nanotechnology sector, which is the science of manipulating atoms and molecules in the creation of materials and devices.

Validating ETFs

As a traditional money manager, the combination of AIM's actively managed funds with a family of passive, index-tracking ETFs validates the importance of one of the fastest-growing segments of the investment management industry, insiders said.

The ETF industry grew to more than $296 billion at year-end 2005, according to the Investment Company Institute, while the total number of ETFs blossomed to 201, with domestic equity ETFs dominating that total.

"We look at this [acquisition] as a validation of ETFs," said Tim Meyer, ETF business manager at Rydex Investments in Rockville, Md. "It's a huge event that will add value to the ETF business." The three-legged stool for any ETF provider includes product, brand and distribution, Meyer added. Rydex has itself been an up-and-coming ETF player and this past December registered to offer seven new ETFs that have not yet begun trading.

While PowerShares' Bond confirmed that his firm had been in discussions with Amvescap for some time, on its own, AIM spent 2005 pruning and preening its mutual fund lineup. It merged several funds, had soft closings on three funds, changed management teams on several and, this past October, launched two new asset allocation funds, and new share classes on a fund that had previously had limited distribution.

M&A Industry Trends

The merging of AIM and PowerShares is one of the first merger and acquisition deals of 2006. M&A activity hasn't been at record levels in recent years, but it has been robust.