AS UAM TRIES TO STAY AHEAD, DEBT MOUNTS AND ASSETS SHRINK: "WE DON’T BORROW JUST TO BORROW," EXEC SAYS, BUT BORROW THEY DO

United Asset Management, a company that has grown almost exclusively by acquiring money managers, is deeper in debt than ever.

For the past three years, the Boston-based money management holding company, which oversees almost $214 billion in assets, has been borrowing heavily in an effort to stay ahead of competitors. As of March 31, UAM had $803 million of long-term debt on its books, a 35% increase from the $596.5 million in outstanding IOUs it had a year earlier. A giant $511 million comes due in 2001.

The firm’s debt exceeded stockholder’s equity by nearly 80% at the end of the first quarter — a figure that is well above those of most rivals, say analysts.

Officials of UAM, which owns some 50 affiliates, aren’t worried.

“The reason for those expenditures is to make acquisitions,” says Bill Park, UAM’s chief financial officer. “We don’t borrow just to borrow.”

With interest rates at all-time lows, Mr. Park says it’s simply cheaper for UAM to borrow money than to use its own stock to pay for acquisitions. It doesn’t help that the company’s stock is languishing. UAM shares, which have lagged their peers considerably over the past year, are currently trading in the $25.50 range, 15% below the 52-week high of $30.19 on Oct. 7, 1997.

how much is too much?

With operating cash flow of $213 million last year, and interest payments totaling $47 million, UAM can cover its interest payments about 5 times over.

“That’s a relatively low coverage,” says Neal Epstein, an analyst at New York investment banking boutique Putnam, Lovell de Guardiola & Thornton. “But they use debt as a feature of running their business so I think it’s OK.”

UAM’s debt-to-equity ratio stands at 1.76-to-1, with the $803 million of long-term debt and stockholder’s equity of $455.5 million. 1996’s figure was 1.1-to-1.

That’s higher than that of other acquirers of investment firms such as NVest Cos. (formerly New England Investment Cos.) with a debt-to-equity ratio of 0.8-to-1 and Affiliated Managers Group with a ratio of 0.7-to-1.

“That’s not a level we’re necessarily trying to maintain,” says Lee Chertavian, a senior vice president at Affiliated, which is also based in Boston. “In all likelihood, we might very well take on more debt for deals in the future.”

While many companies borrow money to grow, too much debt on the books can actually stifle growth — or worse. An overabundance of debt led to the sale of Keystone Investments Inc., the Boston-based money manager, to First Union Corp. in 1996 when interest payments started to impair its ability to invest in growth.

TIme for a turnaround

The increased borrowing comes at a time when UAM is struggling to staunch asset outflows. The firm bled $16 billion in assets last year alone, including a whopping $7.5 billion in the fourth quarter (InvestmentNews, Feb. 2).

UAM posted a profit of $22.1 million in the first quarter, down 8.1% from a year earlier. Revenues increased 12% to $241.8 million. The firm lost $4.1 million last year.

To turn things around, UAM, which owns such fund firms as Pilgrim Baxter & Associates and FPA Capital, has been centralizing its marketing efforts to make better use of the company’s 600 investment professionals and create awareness of the UAM brand.

Will the firm’s efforts prove successful in retaining assets or attracting new ones? Says Putnam Lovell’s Mr. Epstein: “Time will tell.”