Consolidation of money managers can strengthen the acquiring firm

The Outlook

June 30, 1996|By Abbe Gluck

MIXING AND matching prevailed last week in the $3.1 -trillion mutual fund industry.

On Monday, Morgan Stanley Group Inc. said that it was buying Van Kampen/American Capital Inc. for $1.2 billion in cash and debt while Merrill Lynch & Co. announced that it would buy the institutional money manager Hotchkis & Wiley.

Tuesday, Michael Price said he would sell Heine Securities Inc., which manages the Mutual Series Funds, to Franklin Resources Inc. for $610 million.

Such consolidation has been on the upswing.

Over the past two years, Mellon Bank Corp. bought Dreyfus Corp.; Zurich Insurance Group bought Kemper Corp.; Barclays PLC bought Wells Fargo Nikko Investment Advisors; and Morgan Stanley bought Miller Anderson & Sherrerd.

Can smaller fund managers survive? What kinds of companies are likely buyers and sellers? Is consolidation here to stay?

Jim Riepe

Managing Director, T. Rowe Price Associates Inc.

There's no single factor driving these combinations. In some cases, it's an incomplete product line, as was the case with Franklin and Mutual Series. They needed domestic equity. In other cases, it's a desire to have increased exposure to the mutual fund buiness, as in the case of Morgan Stanley.

In T. Rowe Price's case, we have a broad and balanced product line so we do not have large gaps. We have good investment results so we don't need someone to give us good investment performance. We don't have several of the driving factors needed for these combinations, and we think the prices are pretty rich. Someone who has a strategic need will pay higher prices. And we are large enough to compete.

I think if you get a downturn in the market, some of the smaller [firms] will capitalize on the value they've built up in this period and sell, at more reasonable prices.

Michael Lipper

President, Lipper Analytical Services Inc., New York

Almost every fund group has simultaneously been bid for and done bidding. So I think it's going to be price and terms that will cause the next transaction. Our view is that good partners are based on the buyer recognizing that they have a talent deficit and that the buyer highly respects the talent it is acquiring. I think each of the three [new acquisitions] answers the buyer's perceived needs on paper. I think that each one of these deals presumes that the buyers are going to bring additional resources to the sellers. Looks good on paper, difficult if not impossible to achieve.

Franklin has been a successful acquirer in the past, as has been Merrill Lynch Pierce, Fenner & Smith, not necessarily Merrill Lynch asset management. Morgan Stanley has a near-term success in Miller Anderson & Sherrerd, but that's an institutional success, and Van Kampen/American Capital is a retail activity.

Joan Solotar

Analyst, Donaldson, Lufkin & Jenrette Inc., New York

The three firms are all trying to fill in areas in money management where they didn't have experience.

For example, Morgan Stanley received some high-quality equity funds. The merger also allowed the company to grow its overall asset management business, which has been one of its primary goals. At Merrill Lynch, the acquisition was institutionally oriented, where its primary focus before had been in the retail segment. At Franklin, the acquisition also filled in a needed area of expertise, mainly equity.

I have not placed a minimum value upon assets under management for a firm to survive. It depends on the market that the money manager is serving. In the 401(k) business, for example, the systems expense is quite large. But I don't believe that to be true in the retail mutual funds industry. So in the 401(k) sector in particular, there will be pressure to bulk up.

Richard Strauss

Analyst, Goldman, Sachs & Co., New York

The industry is consolidating. A lot of brokerage firms who are looking now are trying to, one, stabilize their earnings and, two, really tap into something that represents growth. Last year, the mutual fund industry grew 30 percent.

Clearly, you have some operations with a much smaller amount of assets. And these companies are extremely profitable, and they are showing excellent growth because they've got a great track record. On the other hand, you can have a fund company with a meaningful amount of assets that is having net outflows because their management isn't as good.

The public market is recognizing the value of these companies to a much greater degree and yet they are still trading at very reasonable levels on the stock market -- at about 16 times earnings -- and many of these companies are delivering 25 percent a year in earnings growth. They're still offering very good value relative to what they bring to an acquirer.

Pub Date: 6/30/96

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