Investment Management M&A to Rise in 2006

As investment management firms increasingly look to separate the money management and distribution sides of their business, divestiture-driven mergers and acquisitions among such companies could hit a record high this year, Putnam Lovell NBF predicts, in a new report called "Shake, Rattle and Roll: Tectonic Realignment."

"The proposed BlackRock/Merrill deal, and last year's groundbreaking Legg Mason/Citigroup transaction, are a wakeup call for the global asset management business," said Benjamin F. Phillips, a managing director at Putnam Lovell and author of the report. "We anticipate that the number of vertically integrated fund management systems worldwide - proprietary funds linked with captive distribution - may now break apart in the near future."

Although divestitures represented 27% of all investment management M&A deals between 2001 and 2005, Putnam Lovell expects that to markedly rise.

In addition, the investment bank expects asset management firms' interest in alternative investment boutiques, especially hedge funds, and overseas expansion to continue to rise. Last year, buyers spent more than $6 billion acquiring $140 billion in assets, up from $84 billion in 2004. North America, Europe and Asia are regions where Putnam Lovell officials expect deals to be made.

Private equity firms are also expected to buy up asset managers, and back-office providers are also expected to go on a buying spree, looking for technology firms that would round out their capabilities in foreign exchange, securities lending, hedge fund administration and turnkey asset management platforms.

All of this activity is likely to boost the market capitalizations of publicly traded firms, and amid all of this activity, hedge funds are likely to float initial public offerings, according to Putnam Lovell.