Merger and acquisition activity within the investment advisory industry is red hot this year, with the second quarter of 2006 already shaping up to be active.
Last week, The Principal Financial Group, of Des Moines, Iowa, agreed to acquire Seattle-based WM Advisors, the $21 billion mutual fund unit of Washington Mutual, a leading consumer and small business bank, for $740 million in cash.
Just prior to that announcement, also last week, Amvescap of London and Atlanta announced plans to buy private equity and hedge fund firm WL Ross of New York for as much as $375 million, depending on the attainment of specific goals. The firm, with $3.5 billion in assets, will be merged into Invesco Private Capital, Amvescap's U.S. direct private equity business.
That was Amvescap's second purchase within the past six months, with the firm announcing this past January that it would acquire exchange-traded fund advisory firm PowerShares Capital Management of Wheaton, Ill., for up to $730 million. That deal expands the investment offerings of its AIM Investments unit of Houston into the burgeoning ETF market.
In addition, earlier this month, Comerica, the Detroit-based financial services company, announced it had hired Morgan Stanley of New York to advise it on the possible sale of its Munder Capital Management unit, which has $41 billion in assets. Besides serving as the investment advisor to the Munder Funds of Birmingham, Mich., Munder Capital manages money for institutions, municipalities, charitable organizations, unions and individuals.
Munder was thrust into the spotlight one year ago when it agreed to become the investment advisor for the Amerindo Technology Fund. In June 2005, the two principals of the fund's advisor, Amerindo Investment Advisors of New York, were criminally accused of stealing the money of a client and using the proceeds to pay personal expenses. Munder adopted the fund and subsequently folded it into its Munder Internet Fund.
The two deals, announced within the first four weeks of the second half of 2006, may indicate the continuation of an aggressive M&A trend within the industry so far this year.
Worldwide, the first half of 2006 saw a record 89 acquisition deals involving fund management firms, the largest number of deals during any six month period, according to a report from Putnam Lovell NBF of New York. That puts 2006 on track to be the best year ever in terms of industry acquisitions, outpacing 2000's record number of deals.
Through the end of June, acquiring firms have collectively spent $13.5 billion to purchase $1 trillion in assets under management, according to Putnam Lovell's report. In 2000, buyers paid $30 billion for $1.4 trillion in assets.
But with the merger agreements announced last week, M&A totals so far this year now stand at $14.6 billion for $1.03 trillion in assets. With five months still remaining in 2006, Putnam Lovell believes the totals may surpass 2000.
Topping the charts as the biggest merger deal so far this year-as well as weighing in as the largest investment management industry acquisition on record based on the value of the deal-was February's announced purchase of a 49.8% stake in BlackRock Financial by Merrill Lynch Investment Management for $9.6 billion, according to Putnam Lovell.
So what is driving the merger and acquisition activity? For Washington Mutual, the sale of its mutual fund unit to Principal Financial was precipitated by the firm's desire to focus on its core business
"The manufacturing' of retail mutual funds by WM Advisors is not part of our core business," said Kerry Killinger, chairman and chief executive officer of Washington Mutual. "This transaction is in keeping with our strategy to streamline our business model and sharpen the focus of our products and services, which target U.S. middle-market consumers and small businesses," he added.
Post-sale, the firm will still offer a variety of financial services, including various mutual funds, to customers through its broker/dealer subsidiary.
But the sale of its proprietary mutual funds to The Principal also paves the way for the two firms to form a closer working alliance. Both firms said that they are actively exploring ways to collaborate on the distribution of various retirement products to Washington Mutual's core audience of customers.
Retirement planning is what The Principal, with more than $205 billion, does best. It is the lead provider of services to the 401(k) marketplace. This mutual fund acquisition nearly doubles The Principal's mutual fund assets under management, bringing the total to $49 billion from $28 billion.
With its retirement savings mindset and a significantly larger mutual fund asset base, The Principal will be able to distribute to a previously untapped audience of customers. Up until now, The Principal has distributed retirement solutions predominantly through employer-sponsored retirement plans. But access to Washington Mutual's middle market clients creates a new wholesale channel for the firm.
As for Amvescap, the recent acquisition of private equity and hedge fund firm WL Ross enables Invesco to expand its own private equity group and gives Amvescap access to a wider range of alternative investment products. That expanded product line complements Amvescap's PowerShares acquisition earlier this year.
For Comerica, the possible sale of its Munder Funds unit will allow the firm to redeploy assets elsewhere. "Comerica intends to use the proceeds from any sale of Munder to advance its strategy of investing in growth markets and businesses, and to repurchase shares [of the company]," Comerica explained in a statement. According to the firm, Comerica had ceased its stock repurchase during the second quarter of this year.
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