Market swings, troubles in Asia worry brokers Banks continue to acquire firms

January 18, 1998|By Bill Atkinson | Bill Atkinson,SUN STAFF

Brokers and money managers have been in financial heaven for three straight years.

A strong economy, a booming stock market and investors' insatiable appetite for stocks have resulted in huge profits.

But now, executives are wondering if they can hold on to the good times in 1998.

Already there are challenges: stock market swings have become increasingly violent and could frighten away investors; Asia's economic problems are deep and could spread damaging large U.S. corporations; and competition between brokers, money managers and banks for the investor's wallet is bound to pick up as the industry consolidates.

"The outlook for 1998 at this stage is strong," said Michael A. Flanagan, a brokerage analyst with Financial Service Analytics in Fort Washington, Pa. "However, further out on the horizon we could see some storm clouds."

One trend that is likely to continue is banks snapping up brokerage and investment banking firms.

Fifty-one investment management firms were acquired in the first nine months of 1997 for a total of $5.5 billion, including Baltimore-based Alex. Brown Inc.

The nation's oldest investment banking firm, whose founder, Alexander Brown, began importing linens in Baltimore 200 years ago, stunned the city when it sold to Bankers Trust New York Corp., on April 6, in a deal valued at about $2.4 billion.

Alex. Brown executives merged because a much larger company would not only give it access to world markets, but a new arsenal of financial products and services.

"The merger is going very well," said A.B. "Buzzy" Krongard, vice chairman of Bankers Trust, and the former chairman and chief executive of Alex. Brown Inc.

Krongard said he is already seeing benefits. There is "a lot of deal flow both ways," he said.

The result of consolidation could mean stiffer competition, Flanagan said.

"There is a burning desire on the part of commercial banks to acquire equity underwriting capabilities almost at any cost," he said. "At the very least, it is going to be a cutthroat environment."

Such deals put pressure on independent companies like T. Rowe Price Associates Inc. and Legg Mason Inc. Both have experienced stock run-ups on days when brokerage and investment banking companies are acquired. But neither Baltimore-based firm has a desire to sell, their executives say.

"If you look at our prospects in the long run, we are better off remaining independent," said George A. Roche, Price's chairman and president.

Raymond A. "Chip" Mason, chairman and chief executive of Legg Mason Inc., is just as adamant about remaining independent. "I haven't changed my opinion at all," he said. "I truly don't see any advantages to hooking up with a bank. I think Legg Mason will do better if we remain Legg Mason."

But the spate of mergers has forced executives to rethink the way they see their companies in the future.

"What you try to figure out is what should the company look like and where should you go. What I don't know is: has the bar moved up? Does that change what you have to be?"

Mason wants the firm to grow to $100 billion in assets under management, and become one of the top 50 money managers in the United States and one of the top 100 in the world.

"We must grow to stay in the business," said Mason, whose firm was ranked on Dec. 31, 1996, as the 69th largest money manager in the U.S. and the 138th in the world by Pensions & Investments, an industry trade magazine.

Legg hasn't shied away from acquisitions. In 1995 and '96, it acquired three asset managers, and in December 1997, it signed a definitive agreement to acquire money manager Brandywine Asset Management Inc. in a stock swap valued at about $135 million. The deal adds about $7 billion in assets to Legg Mason's total portfolio.

Legg's assets under have shot up to $54 billion as of Nov. 30, up 23 percent from March 31, 1997, its fiscal year end. Total revenue is on record pace to break fiscal year 1997's record $639.7 million.

Price's performance has been extraordinary, too.

Its revenue jumped nearly 30 percent to a record $547.8 million in the first nine months of the year, compared with $426.3 million for the same period a year earlier. Net income shot up 46.5 percent to $103.7 million compared with $70.8 million.

Money from retirement accounts and from "do-it-yourself" investors has continued to pour into the company. Nearly $8 billion in net new money flowed into Price mutual funds during the first 10 months of 1997. A total of $8.8 billion flowed into its funds in 1996, and $3.9 billion in 1995.

The industry overall has boomed to $4.3 trillion in assets in 9,143 funds that are managed by more than 500 managers.

"That is truly astonishing," Roche said.

Roche said the outlook for Price should be "pretty good." The company will continue building a burgeoning business of managing 401(k) retirement accounts for companies.

Roche expects Price to generate most of its growth internally.

"We are unlikely to go out and make an acquisition" of another company, he said.

One of the biggest worries facing executives who manage money is the uncertainty surrounding Asia. Economies of Thailand, Malaysia, South Korea and Japan are all struggling and their problems have slammed into the United States.

On Oct. 27, U.S. investors caught a whiff of just how powerful the "Asian flu" can be when the Dow Jones industrial average fell 554 points in one day.

Two months later, bellwether companies like Minnesota Mining Manufacturing Co., Motorola Inc. and Texaco Inc. said their performance would suffer because of Asia's economic problems.

Krongard compared Asia's troubles with a forest fire. If it is contained, "it won't be life threatening," he said. "But if it jumps across the world, then we could have serious problems."

Pub Date: 1/18/98

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