Have giants had their day?

INTERSEC 250

Globalization is high on the agenda at international summits, in the boardroom, and at the sharp end where companies and individuals feel the pain. In investment management it has meant another furious round of mergers, acquisitions and reorganizations as companies continue to equate size and diversification with survival in competing for fickle and increasingly mobile international capital.

At first sight there appears to have been a remarkable amount of movement at the top of the table, but closer inspection reveals that the main reason is the reduction in the figures for assets managed of the largest Japanese institutions. Kampo remains unchallenged for the number one spot but the trust banks’ 1995 figures are some 25% to 40% lower than last year (Euromoney, August 1995, page 71). Comparability between Japan and the rest of the world is always a problem ­ discounting the movement of the Japanese institutions immediately shifts the focus to the sector’s biggest mergers and acquisitions of the year.

Two of the largest transactions affecting the ranking were purchases of US institutions: BZW’s (ranked 3) purchase of Wells Fargo Nikko Investment Advisers and Zurich Insurance’s (20) of Kemper. The US has experienced a feeding frenzy in the financial sector, with hundreds of banks changing hands, some including large fund management operations, such as the merger of Chemical and Chase.

The City of London continues to defy the pessimists, attracting a fresh wave of foreign interest, including ING’s (24) purchase of Barings. The German banks have been particularly visible ­ Commerzbank (46) has been credited with starting off the latest round of UK fund manager M&A with its purchase of Jupiter Tyndall. Dresdner Bank (16) followed suit with Kleinwort Benson: the group’s total assets under management rose by 59% to $178.5 billion, including the partnership interest in RCM Capital Management in the US, bought from Travelers Group. Deutsche Bank located its global investment banking operation at Deutsche Morgan Grenfell and has been aggressively targeting personnel rather than companies.

Accessing new markets by mergers

Recent consolidation within the City includes the combination of Lloyds Bank and the TSB Group, including Hill Samuel (77). The combined group does not show up on this ranking but will manage at least $70 billion, lifting it into the top 50. SBC’s (5) purchase of SG Warburg did not include Mercury (25), creating a large independent player in the European market ­ cynics might say another large takeover target. Mercury is adamant that it can grow and prosper as a specialist fund management group ­ its 21% rise in assets under management certainly cannot harm client confidence.

It looked for a while as if two of the Swiss “big three” might combine but, even within Switzerland, the cultural differences were too great. However, despite the size of their private banking operations, UBS (4) and Credit Suisse (10) clearly do not feel secure. The sight of BZW, SBC and others merging and acquiring on a grand scale may have prompted discussions that, in the end, only served to increase that insecurity. Meanwhile other banks such as Pictet (74), Julius Baer (79) and Darier Hentsch (158) are showing substantial rises in assets under management, with firm strategies in place to target niches in international retail and institutional markets.

Europe has still seen few mergers on the scale of the Chase deal or Mitsubishi/Bank of Tokyo in Japan. Looser cross-border alliances have generally foundered on cultural differences and differing market structures: for example, the ill-fated cooperation of BNP (48) and DresdnerBank (16). However, European companies are better at diversification across sectors, with banking and insurance groups (for instance) successfully muscling in on each others’ markets.

This has its dangers for all parties. Companies have burnt their fingers launching ill-prepared into markets. Retail clients find themselves pressured to purchase cross-sold products in confusing deals that may not offer benefits in terms of price, returns or service. Even large institutional clients are not immune to a brand-led hard sell on combined packages. Regulatory authorities struggle with remits too narrow to cover the web of operations of the industry’s big players ­ mergers between such authorities may be unavoidable.

During 1995 the FT/S&P Actuaries index of continental European equities rose a respectable 9%, but with a fair amount of variation between countries. The Swiss market benefited from general uncertainty to climb 23%, probably also helped by the increasing equity holdings of domestic investors. The Swiss franc also gained from the nation’s “safe haven” status, strengthening the position of Swiss institutions on the ranking, though not helping the Swiss economy much.

Unlike other major European currencies, sterling fell slightly against the dollar, giving UK managers some catching up to do. Traditionally highly equity-oriented, they were helped by an 18% rise in UK shares. Schroders (30) posted a 27% increase in assets under management, picking up awards based on successful teamwork rather than particular star performers. Hermes Pensions Management (72), managing the assets of the Post Office and British Telecom pension funds, showed a 29% increase during 1995. However, a number of big UK names showed only modest growth. NatWest’s (113) assets under management fell by 6% to $25.7 billion but this excludes Gartmore, purchased from Indosuez (59) since the year-end. The sale puzzled many observers, since the fund manager has been one of a very few bright spots on an otherwise fairly gloomy picture for French banks in recent years.

Big isn’t all good

The key to growth will undoubtedly be participation in solving the pensions crisis, but this will be a slow and painful process. Vital issues regarding accountability, equity across generations and income brackets, and the interdependence of retirement provision with other key social, fiscal and political problems will make legislative change tortuous and frustrating. But hasty fixes followed by endless tinkering, let alone solutions without political consensus, will benefit no-one.

Within the industry, many of the arguments put forward to justify the creation of ever-larger groups are coming under attack. Merged operations find that the economies of scale predicted by consultants are difficult and painful to realize. Neither does the sector gain stability ­ larger companies operate on a larger scale, struggle with effective systems of control and make a bigger hole in the system if they fall. As trading scandals multiply, calls for international supervision and formal cooperative safety-nets will undoubtedly increase.