Inside Investment: Breaking up is hard to do
Deutsche Bank is not alone in discovering that a dash for assets can lead to a lingering headache.
When Deutsche Bank paid $2.5 billion for Zurich Scudder Investments in 2002, its then chairman, Rolf Breuer, hailed it as a landmark transaction that "furthers Deutsche Bank’s strategic objective and commitment to achieving scale in our global Private Client and Asset Management (PCAM) business". It was the final big deal of his hyperactive time at the helm of Deutsche, which had also seen the acquisitions of Morgan Grenfell & Co and Bankers Trust. One month later Josef Ackermann took charge.
Times change and so do Deutsche Bank chief executives. Deutsche is now auctioning a large chunk of PCAM, €400 billion in assets under management, just as Ackermann prepares to leave. The waxing and waning of enthusiasm for fund management will bookend his tenure in charge. But Deutsche is not alone in having a schizophrenic approach to asset management. Banks, particularly in Europe, are under intense pressure to shore up their capital. Businesses that were once core and strategic are suddenly peripheral and disposable.
Or that, at least, was the hope. In fact, fund managers are proving to be less fungible than their owners might wish. Last May, capital-challenged Italian bank UniCredit shelved plans to sell Pioneer, the US mutual fund manager it acquired for a king’s ransom in 2000. It has since cited improved revenues and the poor quality of takeover candidates as reasons for keeping the business. Low bids and the unwillingness of potential acquirers to buy Pioneer in one piece also played a role.
That is the problem Deutsche faces now. The businesses it is selling – DB Advisors, Deutsche Insurance Asset Management and real estate manager RREEF – are a curate’s egg. They are good in parts, but do not sit easily together, hence the separate brands. RREEF would be straightforward to value as a standalone entity, but acquiring a property business will not be on the agenda of a consolidator looking to take control of assets and strip out costs.
Deutsche Insurance Asset Management is successful and because of the nature of its business will have long-term relationships and contracts. The cash and fixed-income dominated DB Advisors, on the other hand, is far more susceptible to clients walking out of the door. Price is also likely to be an obstacle. With the exception of RREEF, these are largely low-margin businesses. Deutsche’s reported valuation of €2 billion is modest by the crude measure of assets to price (0.5% of assets). But that still sounds an ambitious target given the business mix and execution risk. However, Guggenheim Partners is now in exclusive negotiations to buy the business.
It is a measure of Deutsche’s mishandling of PCAM that when it paid "just" 0.9% of assets for Zurich Scudder, executives crowed that they had scooped a bargain. At first blush it looked as though they had a point. UniCredit paid an eye-watering 5% of assets for Pioneer – $43.50 a share, a 40% premium to a price that had already doubled in the previous four months. But a lost decade has taken its toll on PCAM.
UniCredit’s rethink and Deutsche’s dwindling band of suitors also reflects a diminishing appetite for asset management businesses. Last year there were a paltry 112 transactions, according to specialist financial services investment bank Freeman & Co. If Deutsche gets its deal done, it would represent more than all the assets under management that changed hands in the top-10 deals in both 2011 and 2010.
Hors de combat
Many banks and insurers, especially in Europe, are hors de combat given the sovereign crises and uncertainty surrounding Basle III, Solvency II, the European Markets Infrastructure Regulation and the upcoming review of Mifid. In the US, banks are scrambling to divest hedge fund and private equity assets as a result of the Volcker Rule and Dodd-Frank. European banks do not need to be asset management manufacturers to generate money from the business. The fund distributor, often a bank branch, retains 41% of the proceeds on average when a Ucits product is sold.
Andrew Capon has won multiple awards for commentary and journalism on markets, investment and asset management. He welcomes comments from readers and can be reached at email@example.com
The best hope for wannabe European sellers of fund managers might be that banks with unencumbered balance sheets from emerging markets decide that there are assets and fees up for grabs at distressed prices. Asset managers still enjoy decent profitability and double-digit growth rates in Europe. One of the more notable transactions in 2011 was the acquisition of private bank KBL (with €47 billion in assets under management) by Qatari investors.
Buying smaller firms and seeing them blossom organically might prove more attractive than big asset-grabbing deals that rarely succeed. The one piece of Deutsche’s tottering asset management empire that is both highly successful and not for sale is European retail powerhouse DWS Investments. While assets under management in other parts of the business have stagnated since the Zurich Scudder acquisition, DWS has grown from €136 billion to €256 billion.
The delicious irony is that this is a business Breuer would have happily ceded control of to Allianz as a dowry for Dresdner Bank in 2000.