Why did Morgan Stanley Dean Witter fly its international top brass to an urgently cobbled-together press conference in Madrid, five days after the news leaked of an acquisition so tiny in the grand scheme of its financials that the firm did not even have to report it publicly? Because the deal kicks off the European roll-out of Morgan Stanley Dean Witter’s global strategy.
When the news broke on February 4 that Morgan Stanley Dean Witter was about to buy up 100% of Spain’s largest independent brokerage house, AB Asesores, the talking point was the price – put at anywhere between $342 million and $480 million. The deal will enrich the firm’s partners, particularly the three founders – president Salvador García-Atance, Pedro Guerrero and Ignacio Garralda – who each hold a 15% stake.
For Morgan Stanley Dean Witter, the deal is a drop in the ocean. AB Asesores’ $122 million revenue in 1998 represents less than 1% of Morgan Stanley Dean Witter’s $16.4 billion. While AB Asesores’ $3.5 billion of assets under management is impressive by Spanish standards, it is just 1% of the total managed by Morgan Stanley Dean Witter worldwide. The price is peanuts given Morgan Stanley Dean Witter’s $53 billion of capital.
But with the purchase of AB Asesores, Morgan Stanley Dean Witter has made a clear commitment to repeating in Europe the full-service strategy it articulated in the US with the merger of Morgan Stanley and Dean Witter two years ago. Given that Europe does not have a single firm with an 11,000 broker network to buy, the execution will have to be piecemeal. Morgan Stanley Dean Witter will be looking for an AB Asesores in each European core market, so copying Merrill Lynch’s strategy of the mid-1990s, when it acquired firms in Europe with considerable local market shares, including Smith New Court in the UK and FyG Inversores in Spain.
“To understand this acquisition you have to look at the logic behind the Morgan Stanley Dean Witter merger,” says Richard Demartini, president and chief operating officer of Morgan Stanley Dean Witter International Retail Client Group. “John Mack of Morgan Stanley and Phil Purcell of Dean Witter really looked at the clients across the board in both groups – the wholesale bank on one side and the retail/asset management/credit card strength on the other … Europe presents a strategic opportunity to export this US strategy of financial advisory and asset management strength. Spain happens to be the first.”
With 3.5% growth forecast for 1999, following on the heels of 3.8% in 1998, and with inflation well below 2% and corporate profits compounding at 12% per year, Spain is the hottest growth story in the EU. Since 1996, the Spanish bolsa has more than trebled in volume, buoyed by an aggressive privatization programme and a sudden awakening of investor appetite due to the convergence-induced drop in interest rates. Sir David Walker, president of Morgan Stanley Dean Witter Europe, says, “Spain is a microcosm of Europe. There may be an element of cyclical froth in the run-up of values in the stock market, but we believe the fundamentals underlying the economy have changed.” JP Morgan has announced that it is also looking to make a Spanish alliance.
Both American giants are hoping to get a piece of a fund management business that is growing by leaps and bounds. Spaniards are moving away from the real-estate-oriented savings patterns they developed in the Franco era to more equity-based portfolios that take advantage of the exuberance of the bolsa. With its network of 40 branches, AB Asesores has the distribution to reach the market. Morgan Stanley Dean Witter has the product to run through it, and not just from outside Spain. Through its corporate finance office in Madrid, Morgan Stanley Dean Witter was the number-one mergers and acquisitions adviser in Spain in 1998, advising on a total of $11.9 billion-worth of transactions. It was the global coordinator of all four tranches of the Argentaria privatization, as well as for Telefónica’s 1997 privatization and 1998 equity issue.
“In the IPO market, Morgan Stanley Dean Witter was always the global coordinator and not the distributor, and AB Asesores was the leader of the local placement,” observes Luis Isasi, chairman of Morgan Stanley Dean Witter Spain. Isasi claims the synergies between the two teams became evident in the first couple of days after the merger, as AB Asesores’ brokers already began clamouring for products. “I got a call from an AB Asesores broker the day after the official announcement, asking me how we could place $100 million that one of their bigger clients has available.”
In November the partners of AB Asesores made clear their conditions for a sale, the most important being that the current team would remain in place for two years. Ample incentives to keep managers in place were included in the merger agreement. “It made perfect sense to keep the team that had survived the three worst economic crises of the last decade in Spain, and made the firm what it is,” says Isasi.
Morgan Stanley Dean Witter may have drawn encouragement from the experience of Merrill Lynch. Even though it had to restructure FyG Inversores, Merrill Lynch has reaped a huge return on its 1996 $20 million investment. Merrill revamped FyG’s client base and oriented the firm’s sales towards larger clients. It also cut staff by almost a quarter over the past three years.
But the strategy paid off. “In 1998 we earned an 80% return on equity on our Spanish business – $27 million on capital of $34 million,” says Claudio Aguirre, president of Merrill Lynch Capital Markets España.
While the competition believes that AB Asesores and Morgan Stanley Dean Witter are complementary in terms of the former’s distribution network and the latter’s international research and wholesale banking product, eyebrows have been raised over the price. “If the price is at the top end of the range we are hearing [close to $500 million], that would be 9% of assets under management – nobody has paid a price like that around the world,” said one US bulge-bracket competitor. “Looking at that price another way, it would be four to six times book value. That is unheard of.” Morgan Stanley Dean Witter vows that the acquisition will meet the firm’s internal return-on-equity hurdles, although it wouldn’t divulge what those are.
AB Asesores could be the last attractive property in Spain, although some point to Benito y Monjardin for the turnaround the company has achieved in the last couple of years.
“They are the only interesting independent left,” says one bulge-bracket US investment banker. With a network of 14 branches, forecast to grow to 20 by the year-end, and $750 million of assets under management, it is not even half the size of AB Asesores. Nonetheless the firm had a net profit of $10.3 million on capital of $29.5 million last year, to yield an impressive return on equity of 35%. It’s not clear whether the firm is for sale, however.
“I think it is possible to survive as a very nimble fish in an ocean of whales,” observes Pedro Monjardin, one of the family firm’s owner/managers. But he admits his firm could be “open to a travelling companion”.
Meanwhile analysts are already betting on Italy or France as the next stop for Morgan Stanley Dean Witter. Margaret Popper
