The good news for the merger and acquisitions market in 2012? Corporate profit margins have soared.

According to the Commerce Department, corporate earnings were $1.75 trillion in the third quarter, bringing after-tax profits to the highest percentage of gross domestic product in history.

But companies remain hesitant about spending their cash, erring on the side of caution when it comes to gauging the market. One indication is the lack of flourishing merger and acquisition activity in the mutual fund and ETF arenas.

"There were fund firm M&As this year?" one press spokesperson went so far to ask in response to Money Management Executive's press inquiry for this article.

Industry insiders agree that M&A activity in 2012 was moderate at best. However, fund experts believe 2013 will produce increased M&A activity, with a focus on strategic acquisitions that would add asset class-specific skill sets to their capabilities.

Companies will probably wait to gain a clearer picture of the overall market before spending their cash.

Expect fund firms to be much more aggressive about expanding their distribution channels and growing their assets, said Alec Papazian, senior analyst within Cerulli Associates' asset management research group.

According to Cerulli's numbers, 59% of managers expect market performance to rise in 2013; only 6% expected market performance to decline.

In addition, most experts agree that the fiscal cliff will pose more of a short-term challenge for companies.

Companies want to spend, said Neil Hennessy, chief investment officer at Hennessy Funds, which finalized its purchase of FBR Funds in late October.

Hennessy is "actively seeking" more mutual fund acquisitions, he said. He estimates Standard & Poor's 500 companies are "hoarding" around $8.5 trillion in cash, money they can use to grow their top lines quickly through acquisitions.

A flat-to-down market may actually be good for companies looking for M&As. "These are the times people are more receptive to sales," said president Steve Graziano of Touchstone Investments, which bought Fifth Third Asset Management in September and finalized its purchase of Old Mutual Asset Management in April. The firm typically looks to buy distressed assets, Graziano said.

Hennessy also expects "more consolidation" in the industry. Mutual fund providers who do not specialize in the field may find fund management to "get very convoluted, very quickly," he explained. Along those lines, he expects banks to continue spinning off their mutual fund units, which are not core products for them.

Other mutual fund managers may want to sell their mutual fund business, but sub-advise back to the firm that purchases it, he added.

Many firms want to build on strategic skillset they're looking to acquire, especially in alternatives. Cerulli reports that in 2012, 28% of managers said hiring from other firms is their primary method of developing new capabilities, vsersus 7% in 2011. The percentage of managers focusing on in-house training, meanwhile, fell to 50% in 2012 from 64% in 2011.

That said, managers relying on acquisitions of asset managers has remained relatively flat, from 11% in 2012 to 14% in 2011.

Examples of firms turning to acquisitions to build specific skills include OppenheimerFunds, which bought SteelPath to bolster its retail alternatives capabilities, and PIMCO, which purchased hedge fund Catamount Capital Management and its manager, Geoffrey Johnson.

Nationwide Funds Group, the investment arm of Nationwide Financial, adopted a global equity and high-yield bond fund from UBS, part of its growth strategy to augment its product line through non-organic growth.

"As the economy starts to grow and as some of the uncertainty is removed, I think there is a possibility for greater activity in 2013," said Timothy Rooney, head of product management and research at Nationwide Funds Group. He said Nationwide is looking for both organic and non-organic growth opportunities. "What will encourage companies generally to look at opportunities is a combination of the low interest-rate environment, and companies now do have cash on their balance sheet where they can look at strategic acquisitions."

ETF M&As, meanwhile, remained "surprisingly" sluggish, Papazian said.

Firms looking to enter the ETF space often bypass the trouble of obtaining approval for exemptive relief from the SEC by acquiring existing ETF providers, such as in the case of Columbia Management Investment Advisers acquiring active ETF manager Grail Advisors last year in 2011. But lately, most firms seem to be filling their own exemptive relief, he observed.

Companies may still need extra motivation from the overall market to open their wallets. According to a Cerulli survey, 77% of managers reported that market expectations affect their budgeting. So it's not surprising experts think managers will remain cautious going into 2013.

Many managers feel wary about the threat of the fiscal cliff and hesitate to make major spending decisions before the government reaches a decision on issues such as dividend law, healthcare policies and taxation.

"Overall, one thing managers do not like is uncertainty. And if you are possibly looking for acquisitions and possibly merger opportunities, any sort of uncertainty is going to have your capital tied up. So that could be something that holds back some firms," Papazian said.

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