Money Manager Mergers on Rise Again
The consolidation wave in the money management business swelled again Monday, with Wall Street titans Morgan Stanley Group and Merrill Lynch & Co. snapping up two smaller firms, and mutual fund legend Michael Price rumored to be on the verge of selling his firm.
In the day’s biggest deal, Morgan Stanley said it will buy Van Kampen American Capital Inc., a major mutual fund company, for $745 million plus assumption of debt.
Also Monday, Merrill Lynch announced its long-rumored acquisition of Los Angeles-based Hotchkis & Wiley Inc., a relatively small but highly respected manager of pension- and mutual-fund assets.
Meanwhile, Franklin Resources, the parent of Franklin/Templeton mutual funds and the fifth-largest fund firm overall, declined to comment on a rumor that it will purchase the Mutual Series funds operated by Heine Securities Corp., whose principal manager is well-known investor Michael Price.
The Franklin-Mutual Series talks were reported by CNBC-TV, which said Franklin will pay $500 million to $700 million in stock. Michael Price also declined comment on the report.
Mergers among money managers--especially mutual fund firms--have accelerated over the last few years, even though the record sums that individuals are pouring into the funds also have allowed many small players to blossom.
Some analysts say the smaller companies in the money management business face increasing costs going head to head with giant rivals such as Fidelity Investments and Merrill Lynch.
“They’re all fighting for shelf space,” said Geoff Bobroff, a Rhode Island-based industry consultant.
But Jeff Lovell, principal at Putnam, Lovell & Thornton Inc., a Manhattan Beach-based advisor to investment firms, said profit margins remain healthy even for many smaller firms, thanks to the industry’s spectacular growth.
“The demand for professional money management services has been underestimated historically,” Lovell said. Merger transactions today, he said, are largely being motivated not by necessity but by fund companies’ desire to quickly realize strategic goals in building up specific products and services.
For Morgan Stanley, one of Wall Street’s preeminent investment bankers serving large institutional clients, the Van Kampen deal brings in $57 billion in assets mostly owned by 2 million individual investors.
Of that total, fund tracker Dalbar Inc. said $31.9 billion was in open-ended mutual funds as of April 30. The rest was primarily in closed-end funds and unit investment trusts.
Morgan Stanley Asset Management, in contrast, has just $8.3 billion in fund assets, although the firm recently added $10.8 billion more in fund assets with its acquisition of Miller Anderson & Sherrerd.
Morgan said Monday that the Van Kampen deal will vault its total assets under management (including institutional money) to $160 billion. Van Kampen, based in Chicago, is being sold by leveraged buyout firm Clayton, Dubilier & Rice.
Morgan made clear that despite its high-brow image, it sees service to small investors as a critical growth area.
“In the United States and around the world, individual investors control a growing percentage of the world’s capital,” said Barton Biggs, Morgan’s chief investment strategist.
Analysts also noted that funds offered to small investors tend to charge higher management fees than what larger investors pay--meaning that Morgan is potentially buying into a higher-profit-margin business.
In the Merrill Lynch-Hotchkis & Wiley deal, the Morgan-Van Kampen roles are reversed: Merrill currently manages $208 billion in mutual fund assets, but it manages just $23 billion in institutional clients’ money.
Hotchkis, on the other hand, manages $10.6 billion total, mostly serving institutional clients such as pension funds and corporations.
Merrill, which has made expansion into institutional money management a priority, needed a well-regarded firm like Hotchkis to quickly make inroads with demanding institutional clients, analysts said.
Hotchkis & Wiley was founded in 1980 by John Hotchkis and George Wiley and has built a strong reputation as a “value” investor in the stock market. Of its $10.6 billion in assets, $7.7 billion is in U.S. stocks.
Gail Bardin, a principal at Hotchkis, said that Merrill called “out of the blue” earlier this year to initiate discussions and that the timing coincided with in-house discussions about how best to build up the company, especially overseas.
She said the deal will give Hotchkis “a strong partner” that will allow the firm to retain most aspects of its independence.
Hotchkis will remain based in Los Angeles. Wiley, 72, plans to retire, while the younger Hotchkis will be chairman of the firm, which will be a “discrete business unit” of Merrill’s Capital Management Group, headed by Michael L. Quinn.
Neither Merrill nor Hotchkis would disclose the price of the deal, but analysts valued it at about $200 million, plus long-term incentives offered to key Hotchkis employees to entice them to stay aboard--a key consideration in a business dependent on good relationships between managers and the institutional clients they serve.
Hotchkis & Wiley has nine principals. Bardin is Wiley’s daughter. Hotchkis’ daughter, Sarah Ketterer, is one of the firm’s international fund managers.
Bardin said the company’s stock and bond mutual funds, with $900 million in assets from smaller investors, will remain no-load funds, meaning they are sold without sales charges.
“Nothing will change” regarding the funds’ management or direction, she said.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Mutual Fund Titans
The top 10 mutual fund complexes already control 48% of fund assets and continue to expand through acquisitions. Asset rankings and assets in billions for the top 10 and three other firms in the news Monday:
1. Fidelity: $385.3
2. Vanguard: 204.0
3. Capital Group: 151.8
4. Merrill Lynch: 150.0
5. Franklin/Templeton: 105.6
6. Putnam: 89.4
7. Mellon/Dreyfus: 75.2
8. Smith Barney: 70.5
9. Dean Witter: 67.2
10. Federated Investors: 61.1
20. Van Kampen/Amer. Cap.: 31.9
30. Mutual Series: 15.9
59. Morgan Stanley: 8.4
Source: Dalbar Inc.
