M&A activity on the rise among asset managers

Jul 16, 2007 @ 8:40 am

By David Hoffman

PHILADELPHIA — An upsurge in mergers-and-acquisitions activity in the investment management industry is leading some market insiders to speculate that deals involving some well-known companies may be in the works.

One name that is being bandied about is Julius Baer Investment Management LLC of New York.

It is widely believed that the company’s parent, Julius Baer Group of Zurich, Switzerland, will sell the firm to help finance the purchase of a 20.7% stake that Zurich-based UBS AG has in the Swiss private bank.

A sale of the asset manager is said to be “very close,” according to an industry consultant, who asked not to be identified.

Julius Baer officials didn’t return calls seeking comment.

Meanwhile, speculation is also swirling around GAMCO Investors Inc. of Rye, N.Y., which is headed by famed investment guru Mario Gabelli.

“That’s a company that could prove attractive, given the pedigree of Gabelli,” said Jeffrey Ptak, a stock analyst with Morningstar Inc. of Chicago.

GAMCO has rallied “pretty strongly” over the past few months, Mr. Ptak said.

The company’s stock opened at $38.58 a share at the start of the year and closed at $59.80 last Wednesday — a 55% increase.

“It stands to reason that one of the reasons it’s rallied is that it could get gobbled up,” Mr. Ptak said.

Douglas R. Jamieson, president and chief operating officer of GAMCO, declined to comment on the speculation.

In search of alpha

M&A activity in the investment management industry has been hot, and some industry experts said they expect it to get even hotter.

The total number of deals worldwide in the first six months of the year rose to 112, from 86 in the year-earlier period, according to preliminary data released last week by Putnam Lovell NBF Securities Inc. of New York.

As long as the markets don’t take a dive, the second half of the year should see even more activity, said Ben Phillips, managing director and head of strategic analysis at Putnam Lovell NBF.

Industry observers said they expect to see more deals that look like two entered into last month when Security Benefit Group of Companies in Topeka, Kan., said that it would acquire Rydex Investments of Rockville., Md., and Ixis Asset Management North America LP of Boston said it would buy Gateway Investment Advisers LP in Cincinnati.

Rydex and Gateway aren’t your typical investment managers, but that is part of why they were attractive to suitors. Rydex has built a suite of exchange traded funds and mutual funds that appeal to active traders, while Gateway is a hedge fund shop.

They both offer alternative investments, and in a world where generating alpha is more important than ever because of anticipated low returns, such companies are attractive, industry experts said.

That is one reason why demand for “plain vanilla” investment managers is scarce, Mr. Phillips said.

“It’s a war for talent, not for money,” he added.

That is a shift from the M&A activity seen in the investment industry during the late 1990s, when there was an almost “mindless desire” for assets, said Burton Greenwald, a Philadelphia-based fund consultant.

Potential acquirers are now much more interested in grabbing products that will help them keep and retain customers in what is expected to be a low-return environment, he said.

To some extent, the potential acquirers are the usual suspects — larger companies with deep pockets.

HSBC Holdings PLC of London, the second-largest bank in the world, would be a good candidate, Mr. Greenwald suggested.

So would insurance companies looking to leverage their expertise to meet the needs of the baby boomers who are nearing retirement, said Geoff Bobroff, a mutual fund consultant in East Greenwich, R.I.

One thing seems certain, however: Acquirers will have no shortage of companies from which to choose, he said.

The majority of M&A activity will likely take place in the “middle” of the industry, meaning companies with between $10 billion and $50 billion in assets, Mr. Bobroff said.

There are hundreds of such companies, he said.

And there are many reasons why such companies would want to sell, Mr. Bobroff said.

Because the stock market has done so well recently, that has helped the stock price of many publicly traded investment managers, Mr. Ptak said. As a result, investment managers that are looking to sell can probably do so at a premium, he said.

Premiums won’t scare away potential buyers, because “money is still relatively cheap and … in a sense, can justify slightly higher multiples,” Mr. Ptak said.

Combine that with issues that have always been a problem for midsize investment managers — access to distribution and increasing regulatory expenses — and it seems likely that the M&A wave will continue, Mr. Bobroff said.

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