MFS Off The Table May Mean Tough Times for Company, Putnam
October 30, 2006
Once upon a time, mutual fund complexes were the cash cows of their annuity company parents. Not anymore.
The big bad mutual fund scandals changed that fairytale relationship by drawing greater attention to these companies' tactics, and in the case of companies like MFS Investments and Putnam Investments, did significant damage to reputations and revenues.
Sun Life's decision to yank MFS from the M&A market last week might be the clearest example of how much more difficult selling these offshoots has become.
"The market for load-fund companies is not real hot right now. I think that's the message you're getting," said Chip Roame, a managing partner with Tiburon Strategic Advisors in Tiburon, Calif.
Experts warn against getting sucked into the idea that MFS's withdrawal from the marketplace creates a vacuum that may draw a higher value for its fellow Boston-based fund company, Putnam.
Despite the almost-instant headlines pointing to potential suitors for the Marsh & McLennan Cos. (MMC) division, which cropped up after the Sun Life decision was announced, analysts say both companies face significant challenges.
For MFS, the fact that Morgan Stanley dealmakers were unable to locate a suitable partner suggests that Sun Life overvalued its asset and had untenable terms.
Among those terms was that Sun Life sought to keep a stake in MFS, which represents 10% of its overall business. MMC, on the other hand, has expressed no interest in having a say in Putnam operations after the sale of the fund company, which represents roughly 20% to 25% of its business.
When Sun Life first announced plans to sell MFS, the market responded by driving its share price up 6%, said Dafina Dunmore, an analyst with Chicago-based Morningstar.
Before announcing all bets were off, Sun Life announced, earlier than scheduled, the division's third-quarter earnings were up 37%, and pre-tax profits up 30%.
When the company stated last week that it would retain its fund business, share prices slumped slightly. "What you saw was investors taking some kind of premium off the table," Dunmore said.
Sun Life's next challenge is pumping some premium back into MFS, being careful not to rattle what could be already-delicate investor confidence.
"If a company says, Look, I want to sell the division,' investors are going to say, You want to sell it for some reason,' and if you can't sell it, it means it's worth less [than the owner thinks]," said Dick Bove of Punk, Ziegel in New York. "If you're a personal investor, you're not going to be rushing to put more money in," he said. From that standpoint, he said, "This is clearly a negative development."
"Investors will keep a closer eye on them," agreed Jeffrey C. Keil, principal of Keil Fiduciary Strategies in Denver. And although investors probably would not perceive a change in ownership of their fund company, they are quick to notice changes in service and performance. They're also quick to leave if those changes seem negative, he said.
Sun Life, which officially announced third-quarter earnings in a call Thursday, was unable to respond by deadline for comments on specific plans to muster more profits from MFS, but analysts cite two options: cutbacks for short-term gains, and investments in long-term growth.
The right answer will likely be a delicate balance between the two, experts agree.
"Management is going to look seriously at some cost-containment efforts," Dunmore said. "Some heads are going to start rolling, but they're also going to look to grow the business to gain capability."
"When you see lots of layoffs and slimming in staff or your portfolio manager is taking on [separately managed accounts], that can make investors somewhat leery and can cause brand damage," Keil said.
Commitment to the core business is also key to retaining and increasing the number of employers and intermediaries who choose MFS for their retirement plans. "When there's uncertainty out there with what's going to happen ultimately, plan sponsors and consultants are going to be reticent to appoint MFS for any new mandates," said Michael Mayhew, chief executive officer of Integrity Research Associates in Darien, Conn. The company must be ready to address and allay any fears. "They need to have a coherent strategy," Mayhew added.
Part of that strategy will be a focus on growing its overseas business, said MFS spokesman John Reilly. Of MFS' $70 billion mutual fund assets, $7 billion, or about 10%, are overseas, he said, adding that while the company's mutual fund business suffered outflows in recent years, its institutional businesses, including defined benefit, variable annuity and sub-advisor functions, more than made up for it, resulting in a net positive growth of $6.7 billion in the last seven quarters.