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Magazine Issues » Dec 2009-Jan 2010

M&A: fitting the pieces together

Expected M&A in fund management has been tempered by availability of cash. Fiona Rintoul finds views about activity for 2010 are divided...

jigsaw.jpgThe flood of M&A deals predicted for the asset management sector in the wake of the global financial crisis didn’t really happen. There have, of course, been some big deals – BlackRock/BGI, Aberdeen/Credit Suisse, Henderson/New Star, BNP Paribas/Fortis – but there have also been plenty of potential deals that did not materialise.

“Six months ago most potential acquirers were worried about their own business and not that interested in acquiring,” says Nigel Wightman, CEO of Titanium Asset Management.

There were perhaps 40 to 50 asset management firms up for sale around Europe, but the number of transactions that went through was limited, agrees Nick Baker, chief executive of Alpha Financial Markets Consulting (Alpha FMC). Lots of people would have liked to sell if they could, but the old adage applied: too early to buy, too late to sell.”

Baker adds: “People needed more realism about the price they could expect. 2009 was quiet in terms of the number of deals. There weren’t that many people with cash.”

Certainly, consolidation did not happen. Numbers from the fund industry research firm, Lipper FMI, show that in Europe the number of ‘master groups’ (a term that effectively groups asset management companies with the same parent under one heading) actually went up in 2009 to 1,622 currently, from 1,541 last year.

“Consolidation in terms of numbers of active players is unlikely,” says Diana Mackay, managing director of Lipper FMI. “As groups merge at the top end, new players emerge at the bottom.”

With the market upturn, however, interest in acquiring has returned. Phones are ringing, says Wightman, although that doesn’t mean that deals are necessarily being done.

“Most of the sales we’ve seen to date have been involuntary,” he says. “When it comes to voluntary sales – people who would be happy to become part of a bigger business at a price – the price has changed. The position of the seller has also changed. Going it alone is now much more plausible.”

So, what happens now?
The two most recent deals in the European fund industry – BNY Mellon’s acquisition of Insight and RBS’s proposed disposal of its asset management division – both have more than an element of the involuntary to them. They both have a similar price tag too.

Insight went for £235m (€258m) and boosted BNY Mellon’s assets by £83bn. RBS’s asset management arm is expected to fetch between £250m and £300m and will bring its acquirer assets of around £30bn.

Is this expensive compared with the £250m Aberdeen AM paid in shares for Credit Suisse’s SFr62.8bn (€41.2bn) of long-only assets at the tail end of last year when the crisis was in full flight?

“The problem with pricing fund management deals is that markets don’t stay static,” says Wightman. “Were fund management companies cheap in March? No, because in a P&L sense they were in poor shape. Are they now expensive? Not necessarily because in a P&L sense they are better.”

The BNY Mellon/Insight deal was, of course, a completely different type of deal from, say, BlackRock/BGI or Aberdeen/Credit Suisse in that it wasn’t a game-changer either for the acquirer or for the industry. Ron O’Hanley, CEO of BNY Mellon Asset Management, assesses the deal, which took the firm’s AUM past the $1 trillion (€6.8bn) mark , soberly.

“We have a broad set of investment capabilities and we wanted to supplement it by building a solutions capability,” he says. “Insight brought us a set of skills that brings us to scale in a particular area [liability-driven investment]. It fits right into our multi-boutique model.”

In line with the BNY Mellon multi-boutique model, Insight will keep its own brand name and investment process. There will be “moderate cuts in staff”, the bulk of staff cuts having already been made when the business was broken up coming out of Lloyds Banking Group.

Asked if the magnitude of the BlackRock/BGI deal – described by Wightman as “a stunning deal” – has thrown down a gauntlet to firms like his own that play in the major league but are now dwarfed by the $3 trillion market leader, O’Hanley is sanguine. “BlackRock/BGI is in a class of its own in terms of size, but the rationale [for the merger] was not dissimilar to what it was for us. What BlackRock bought was complementary skills.”

Isn’t BNY Mellon tempted to play catch-up by looking for more acquisitions?

“We certainly get shown everything but we don’t need to acquire,” says O’Hanley. “Our organic growth record speaks for itself. I would say our growth going forward will be as much organic as M&A.”

Right now a key target for organic growth is the new Insight division within BNY Mellon. With the challenges facing pension funds worldwide, O’Hanley believes BNY Mellon can grow Insight’s business significantly.

But what of BNY Mellon’s competitors? What’s their next move? Opinion varies. Alpha FMC’s Baker expects the M&A floodgates to open next year, while Titanium AM’s Wightman forecasts that “not much of anything will happen”.

“2010 will be back to business as usual,” says Wightman. “There will not be a great deal of M&A.”

Baker and Wightman are perhaps not as far apart as it at first appears. If a buyer were to turn up at banks around Europe offering a reasonable price for the asset management arm, those banks would bite the buyer’s arm off, says Baker.

That’s almost certainly true. The deficiencies of the universal bank-owned asset management model at the present time are well known.

“Financial institutions that own asset managers in Europe will be rethinking whether that makes sense, particularly bank-owned firms that were in the past relying on bank distribution,” says O’Hanley. “They need the bank branches now to secure funding for their own banking activities. I see several of those bank-owned asset managers coming on the block.”

Wightman probably wouldn’t disagree with any of that. He just can’t see any buyers coming forward to pick up these bank-owned asset managers.

Lipper FMI’s Mackay is also sceptical about the bank-owned asset managers’ attractiveness to potential suitors.

“There’s not much appetite to buy because the asset management skills in those companies are tied to distribution,” she says. “If you don’t have the distribution the company doesn’t have much value. It doesn’t give you access to new markets, it doesn’t give you access to products you don’t have already and it doesn’t give you cost savings.”

Bank-owned asset managers may therefore seek other solutions, suggests Mackay.

They might team up à la merger between Crédit Agricole Asset Management (Caam) and Société Générale Asset Management (Sgam). Their owners might wind them down to a position where they are simply running proprietary money and not doing much else. Or the parent bank might go the opposite route of severing the umbilical cord and making the asset manager more reliant on external distribution – a route that might also make the asset manager more attractive to a potential purchaser further down the line.

Meanwhile, in the difficult-to-occupy middle ground a dynamic rather opposed to this is at play, suggests Wightman. There are buyers but no sellers.

“It’s difficult to survive in the mid-ground in the medium to long term. The problem for medium-sized players is: How do you become a mega-player? If you are Schroders, how do you become three times as big?”

The difficulty of occupying the middle ground is exacerbated, says Wightman, by the fact that the business has been gravitating towards index strategies for the past 20 years. The likes of Crédit Agricole can respond to this development by launching its own exchange-traded fund (ETF) management division, but that’s not an option open to most mid-size companies.

“ETFs are a low-fee business,” says Wightman. “You need to play in considerable scale, and you need considerable infrastructure and marketing spend.”

Next steps
What, then, are the options for mid-size companies? They can stay where they are. They can merge. They can go for an IPO.

Some may find themselves slipping into the hands of buyers from the private equity or hedge fund side of the business, as Gartmore did. However, the chances of this are reduced by the “fair amount of terminal damage” that’s taken place in the hedge fund world, says Wightman.

Another option is to find a new home, like Insight has done in the multi-boutique environment.

“This gives mid-size players a home but also autonomy, though how much autonomy you get depends on the firm you’re going into,” says Baker.

Baker also points out that the mantra that the middle ground is a hard place to be doesn’t necessarily hold true. “We have data that show you can be a mid-size player and do well,” he says.

Something more than a year after the global financial crisis began, we have an industry that is altered, but perhaps not as altered as it would have been if the dip had lasted longer.

The BlackRock/BGI deal has undoubtedly raised the bar, creating a mega-firm with its own self-branded market leader in the ETF sector. In Europe, the BNP Paribas/Fortis merger has created a  new regional leader. The French group is now the largest asset manager in Europe, though Lipper FMI’s Mackay suggests that Amundi – the new name for the merged Caam/Sgam unit – might steal that mantle in short order.

The route forward is uncertain, however. O’Hanley suggests we are moving towards a classic barbell model, with a small number of multi-capable providers on one side and many small, single-strategy boutiques on the other – although this future was also routinely predicted before the crisis.

“Change will be in the middle,” says O’Hanley.

No doubt he’s right. However, it’s far from clear how that change will be achieved.

©2009 Funds Europe