Last week, Amvescap of London and Atlanta announced it would purchase PowerShares Capital Management of Wheaton, Ill., sponsor of 36 exchange-traded funds, for an initial purchase price of $60 million in cash plus additional contingency payments of cash and/or stock over the next five years. The financial structure of the acquisition agreement could push the merger deal to as much as $730 million and largely depends on the growth of assets under management, an Amvescap spokesman said. The maximum amount could be earned by PowerShares principals if assets reach $125 billion.
The deal, which will expand the investment offerings of Amvescap's subsidiary AIM Investments of Houston, as well as significantly bolster the distribution of PowerShares' ETFs, is expected to close in the first or second quarter of 2006. Executives at PowerShares, including President and CEO Bruce Bond, are expected to continue for the foreseeable future.
PowerShares' family of 36 ETFs with a combined $3.5 billion will be added to AIM's existing lineup of 64 retail mutual funds, 12 institutional funds, 32 sub-advised funds, plus an assortment of private client and separately managed accounts. All told, AIM sported $129 billion in combined assets under management as of Sept. 30, 2005.
AIM's wholesalers are expected to begin offering the complementary ETF products to financial advisers later this year, many of whom utilize fee-based platform programs, confirmed Gene Needles, president and CEO of AIM Distributors at a press conference. "This is just one more solution we can bring to the marketplace," he said.
Of particular interest is getting the PowerShares ETFs included in retirement plans, an area in which ETFs have not had great penetration, said Mark Williamson, president and CEO of AIM. A decision as to whether to co-brand the PowerShares ETFs with either AIM or Amvescap has not yet been made.
The addition of the PowerShares' suite of ETFs is a natural extension of Amvescap's capabilities, and complements AIM's breadth of actively managed mutual funds, said Marty Flanagan, CEO of Amvescap. "This puts us in a very important and leading position in the marketplace that no one [else] has offered," he added.
PowerShares isn't the largest ETF sponsor by asset size. In fact, it's in fourth place behind ETF leader Barclays Global Advisors, which sports a lineup of 102 ETFs with $179 billion under management. State Street Global Advisors and Vanguard are also formidable ETF sponsors.
But PowerShares is one of the most aggressive in terms of seeking to quickly bulk up with vast product offerings. It made its first foray into the ETF marketplace in May 2003 with two ETFs, and now offers a broad array of innovative and niche ETFs that track specific, custom-crafted market indexes created by outside firms or stock exchanges. It is also the first to offer an ETF that provides exposure to the nanotechnology sector, which is the science of manipulating atoms and molecules in the creation of materials and devices.
As a traditional money manager, the combination of AIM's actively managed funds with a family of passive, index-tracking ETFs validates the importance of one of the fastest-growing segments of the investment management industry, insiders said.
The ETF industry grew to more than $296 billion at year-end 2005, according to the Investment Company Institute, while the total number of ETFs blossomed to 201, with domestic equity ETFs dominating that total.
"We look at this [acquisition] as a validation of ETFs," said Tim Meyer, ETF business manager at Rydex Investments in Rockville, Md. "It's a huge event that will add value to the ETF business." The three-legged stool for any ETF provider includes product, brand and distribution, Meyer added. Rydex has itself been an up-and-coming ETF player and this past December registered to offer seven new ETFs that have not yet begun trading.
While PowerShares' Bond confirmed that his firm had been in discussions with Amvescap for some time, on its own, AIM spent 2005 pruning and preening its mutual fund lineup. It merged several funds, had soft closings on three funds, changed management teams on several and, this past October, launched two new asset allocation funds, and new share classes on a fund that had previously had limited distribution.
M&A Industry Trends
The merging of AIM and PowerShares is one of the first merger and acquisition deals of 2006. M&A activity hasn't been at record levels in recent years, but it has been robust.
According to SNL Financial of Charlottesville, Va., there were 160 M&A deals among securities and investment management firms in 2005 and 157 in 2004. "I think we'll continue to see M&A activity in 2006," said Eric Fitzwater, a senior analyst in the financial institutions group at SNL Financial. Many of the deals last year fell into the same realm as the AIM acquisition: a firm looking to diversify its holdings by adding new products, Fitzwater said. "Some companies feel that they need to provide all investment solutions, but many feel that they need to diversify their revenue stream," he said. Where firms look for complementary partners, the deals tend to be smaller. The larger deals have been seen where firms seek to bolster existing capabilities, he added.
It's likely we'll see more mega deals this year, like the 2005 Citigroup/Legg Mason deal, which was "landscape changing," Fitzwater said.
Another big driver of M&A activity now is the desire of companies to add alternative investment capabilities to their offerings, including buying hedge funds-of-funds. According to Putnam Lovell NBF, an investment banking firm in New York, growing client demand for alternative investment products is driving larger firms to seek out niche players. Four such deals have been announced since December, the most recent being ABN Amro Asset Management's purchase of International Asset Management, and KeyCorp's investment management subsidiary's acquisition of Austin Capital Management.
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