There was a rush of acquisition activity in fund management last month, sparking talk of another round of consolidation. If this comes about, M&A bankers will raise a huge cheer.
They will be hoping this run of deals is the start: if not of an avalanche, then at least a small landslide. Hard times in fund management, with dead markets forcing parents to consider selling off investment houses, could mean bonus time again for the M&A piranhas.
In the UK, Threadneedle has been bought by American Express from Zurich Financial Services, while US Trust, the high-net-worth subsidiary of Charles Schwab, is taking over State Street’s private asset management business and Lehman Brothers is widely tipped to take over Neuberger Berman at any moment.
It is hard to draw like-for-like comparisons between these three deals: the sums being paid for them are wildly different, but so is the nature of the three acquisition targets.
The normal benchmark used to assess the worth of a fund management deal is the price paid as a percentage of assets under management. Of these three, American Express seems to be striking the best bargain: forking out $570 million, less than 1% of Threadneedle’s $75 billion in assets under management.
US Trust is paying State Street $365 million for $11.5 billion of private asset management assets (clients are those with at least $2 million to invest). Lehman is said to be about to pay $3.1 billion for Neuberger’s $56 billion of assets. Again Neuberger’s business is for wealthy individuals. High-net-worth clients provide higher-margin business, hence they should fetch higher prices than institutional money managers.
Set against the sums that were spent on fund management businesses at the top of the market, these prices are low. Compared with the $5.3 billion that Merrill Lynch paid for institutional manager Mercury, some 3% of assets under management, they are a snip.
As one market player says: “Amex has got Threadneedle for a song, compared with what was going on a few years ago. At that price they have a very good chance of making it work. It makes the £1 billion Amvescap paid for Perpetual look absolutely crazy now.”
Why now? So why sell now? Surely an operation full of people paid to assess the value of businesses would not wish to sell itself short in troubled times? Zurich says the sale is part of its strategy to focus on core businesses. It sold Scudder to Deutsche Asset Management last year. Insurance houses have long been sniffed at as strong parents for fund managers.
Threadneedle calls the deal “excellent news for our clients”. It says having the Amex name behind it gives it a strong backing in financial services. For his part, Jim Cracchiolo, chairman and chief executive of American Express Financial Advisors, says the growth potential in the European market made Threadneedle an attractive target. “[This] is part of our overall strategy to expand our financial services business globally,” he says.
Simon Davies remains as Threadneedle’s chief executive, reporting to Cracchiolo. Threadneedle also keeps its brand name and will continue to manage Zurich insurance products for at least the next eight years, provided performance is satisfactory.
And State Street and US Trust are both making cases for the timing of their deal. State Street’s chairman and chief executive, David Spina, says it is time for the bank to concentrate on its core business, which is slanted towards institutional asset management. “This transaction enables us to direct resources to opportunities that will contribute to building our leadership position in global financial markets,” he says.
M&A bankers at Credit Suisse First Boston, which advised American Express; UBS, which advised Zurich and US Trust; and Goldman Sachs which advised State Street, will not be complaining after their recent tough times. But with the sale prices so much lower than in the boom years the fees coming in still won’t be that great. And according to the latest research from Boston Consulting Group, fund managers can only expect to grow their assets at around 0.7% a year which is a world away from the roaring 1990s.
No surprise then that they are willing the Neuberger deal to go through at the moribund M&A desks of the big investment banks. But the analysts too are excited. Guy Moskowski of Merrill Lynch says of Lehman’s intended deal: “We think a potential combination has strategic merits in that Neuberger’s high-net-worth business has strong performance and a good brand name, and could probably be grown faster through use of the Lehman sales force.” However, he adds a caveat: “Lehman needs to be careful to avoid overpaying; at levels much greater than $3.1 billion, clearly the numbers would not be accretive.”
For its part, Lehman has previously seemed happy to dip an occasional toe into fund management waters, without taking the full plunge. Working with the likes of former JPMorgan Investment Management’s Wes Paul to launch Edgeworth Capital, a hedge fund boutique, seemed to be the order of the day. However last September, Raul Biancardi, Lehman’s head of private banking and investment management in Europe, told Euromoney that Lehman would pick and choose the occasional deal and, with prices coming down, was certainly contemplating a banner deal if the price was right. It seems that Neuberger may be a sign of things to come.
The relief in the M&A world is tangible. As one fund management M&A specialist in London says: “We have seen very little activity. Maybe things are picking up again.”
