Mergers and acquisitions (M&As) among investment companies reached a record this year, and the feverish deal making may continue into the new year as the move toward open architecture and globalization drives companies to seek attractive opportunities.
The number of transaction rose this year to 167 as of last month, compared to the previous record of 159 in all of 2004, according to Putnam Lovell NBF Securities of New York.
The amount of assets acquired totaled $1.41 trillion through Nov. 14, exceeding the previous peak of $1.37 trillion established in 2000, Putnam Lovell found.
"Now that we are in a bull market, companies are taking a deep, strategic look at their business," said Ben Phillips, managing director and head of strategic analysis at Putnam Lovell. "Companies are assessing where they want to go and what areas of business they want to concentrate on."
The industry is moving toward open architecture, and that can be driving some of the deals, as it is difficult to rely solely on proprietary products, said Burton J. Greenwald, president of B.J. Greenwald Associates, a fund consulting firm in Philadelphia.
With 77 million Baby Boomers set to retire, firms are bringing an influx of products specifically designed for them to market, and this has been one of the biggest drivers of M&As, Phillips said. Firms need these products to remain competitive, he said.
Additionally, the playing field has widened internationally, and firms have to position themselves globally to remain competitive, experts noted. Foreign companies are also increasingly looking to participate in the U.S. market. For example, Putnam Investments, the investment management unit of Marsh & McLennan, may be sold to Amvescap of the U.K., UniCredito of Italy or Power Corp. of Canada. Similarly, U.S. companies want to expand their business overseas.
Building the infrastructure to have a strong overseas presence is very hard, so it is easier to merge with companies, Greenwald noted.
Alternative investments, which include hedge funds, real estate managers and firms specializing in debt obligations, also played a role in driving M&As this year and will continue to do so in 2007, experts said.
"A maturing alternative investments segment is sure to yield more deal making between entrepreneurial firms and talent-hungry financial services companies," said Steven Pierson, managing director and head of investment banking at Putnam Lovell.
"Alternative investments are all-weather vehicles that are not correlated to the market," Phillips added. If the market tumbles, the investments will be protected and if the market does well, the investments will make money, he commented.
This year, 46 transactions involved alternative asset managers. The previous record was 30 deals in 2005, according to Putnam Lovell. Transactions involving hedge fund managers and hedge funds-of-funds continue to comprise the majority of deals in the alternative investments segment, numbering 32.
Private equity firms will continue to do well, as companies need a place to put their money and asset management firms are an attractive target. "Private equity firms may be even more active in [M&A activity] targeting asset management businesses amid strategic reviews identifying core operations. Consolidation in the U.S. retail fund business is real and accelerating," Pierson said.
Companies want to maintain their independence and keep their culture during and after a merger and are able to do that when a private equity firm is handling the deal, Phillips noted.
This year, the largest amount of acquired assets by financial sponsors such as private equity firms set a record, with approximately $186 billion. The previous record was $118 billion in 2004.
Initial public offerings have never been a huge component to M&A activity, but they are a factor, and more will be seen next year. "Asset management company IPOs in 2006 have totaled less than 10% of the combined disclosed deal value of asset management M&A activity worldwide this year," Phillips said.
Not everyone will be gearing up to go to market, but it is interesting to consider that more hedge funds are thinking of IPOs in light of the fact that they have fought hard not to be regulated and are usually very secretive about their business, experts said.
The largest IPO to date in the asset management industry was London-based Ashmore Group, which raised $560 million in October. Hedge fund Fortress Investment Group, which is set to go public in the next few weeks, will likely raise an even larger amount, experts predicted.
The biggest M&A deal in history was BlackRock acquiring Merrill Lynch's fund management operations in exchange for a 49.8% stake in the publicly traded company. The deal was valued at $9.6 billion, and the acquired assets were $544 billion.
Mega players will continue to dominate and there will most likely be more large deals similar to BlackRock and Merrill Lynch, as companies want to expand their workforce and realize economies of scale, Greenwald said.
The biggest management buyout in asset management history, by asset size, was the acquisition of Gartmore Investment Management's European business by Gartmore management and private equity firm Hellman & Friedman, which acquired it for $44.9 billion.
"This year indicates how profitable and attractive the asset management business is, and it will continue to grow," said Greenwald.
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