DEAL WATCH: A PRETTY GOOD WAY TO MANAGE ASSETS: SELL THE ASSET MANAGER: IN 1987, MONEY FIRMS FETCHED 1.8 TIMES REVENUE; IN ’96, 3.7 TIMES REVENUE; LAST YEAR, IT WAS 4.5 TIMES
Prices paid for money management firms have surged in the past decade, thanks to the roaring bull market…
Prices paid for money management firms have surged in the past decade, thanks to the roaring bull market and growing scarcity of independent investment management companies.
According to data compiled by Berkshire Capital Corp. in New York, the average price paid for money management firms in 1997 was 4.5 times revenue, and 2.8% of assets under management. That’s a hefty 150% jump from the 1.8 times revenue, and 1.76% of assets paid in 1987.
Price tags on these deals have climbed in the last couple of years, as well, says Glenna Webster, principal at Berkshire Capital, a private investment banking boutique. In 1996, acquirers paid, on average, 3.7 times revenue and 1.3% of assets under management.
Investment Counseling Inc. of West Conshohocken, Pa., which also follows mergers and acquisitions in the money management business, found similar results. According to its review of 1997 activity, the average multiple paid in 1997 was 4.08 times revenue and 2.64% of assets.
In 1997, 33 institutional money managers were acquired, nearly double the 17 acquired in 1987, according to Berkshire, but down from the 40 acquired in 1996.
The total value of 1997 deals came to $8 billion, says Ms. Webster, compared with $335 million in 1987 and $2.9 billion in 1996. “One mammoth deal — Merrill Lynch’s $5.1 billion acquisition of Mercury Asset — skewed the 1997 data,” observes Ms. Webster.
“If you remove that deal, the value for the 1997 deals was $2.9 billion, the same dollar value as (1996), but for fewer deals,” she says.
1997 A VERY GOOD YEAR
The increased yen for money managers boosted prices in 1997.
“With the bull market, money managers did well, revenues increased, and the added profitability has driven up the prices. There is a lot of demand on the buy side, and it boils down to a question of supply and demand, because many independent managers aren’t interested in selling. As a result, competition for those firms that are willing to be acquired has intensified,” says Ms. Webster.
Buyers have become more careful before committing, because of the high multiples, adds David Silvera, senior consultant at Investment Counseling, which was one reason there were fewer deals in 1997. The same has been true so far this year, he says.
Berkshire’s data bear this out: This year’s first quarter saw seven deals; last year’s saw 22.
“But for the year as a whole, we don’t expect to see fewer deals. There is a tremendous amount of activity, with many deals in the pipeline.”
New types of acquirers have been moving into the business. Ms. Webster says, including publicly traded financial services firms and Europeans, while banks and insurance companies continue to be attracted to these businesses.
A big trend Berkshire has noted is “second-generation sales” — where acquiring institutions look for a new home for the target company because it no longer is an appropriate holding.
One example is NationsBank, which sold ASB Capital Management to Chevy Chase Savings Bank last year after it no longer fit in with NationsBank’s long-term strategy.
IN, OUT LIKE A FLASH
A similar, but speedier, scenario occurred at LGT Global, which bought Chancellor Asset Management and tried to merge it with its GT Mutual Fund family. LGT sold Chancellor to Amvescap PLC at the end of January.
Ms. Webster predicts the trend of second-generation sales will continue, as will consolidation in the industry. At the same time, new companies will start up, because it’s a business that attracts entrepreneurs.
Another industry trend is for management firms to go public, Mr. Silvera says. There also seems to be an increased interest in buying hedge fund companies.
Crain News Service
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