Short-Pocketed Banks Sulk in the Shadows at Asset-Managers Auction

The race to acquire U.S. fund companies is shaping up to be the biggest M&A game of 2000. Too bad that most American banks, which have long coveted the asset managers, are being shoved aside by more aggressive suitors, particularly deep-pocketed Europeans.

In a financial services version of a Henry James novel, fund companies are receiving advances from a range of earnest would-be acquirers on both sides of the Atlantic, including other asset management firms, brokers, banks and insurance firms. But most American banks -- which crave and need the steady revenue growth that fund companies generate -- are getting trampled out of this pairing process, according to analysts and investors.

This is hampering the banks' efforts to reduce their exposure to traditional lending revenue, which can swing wildly with interest-rate levels and cause volatile earnings. Witness the experience of Wachovia (WB), whose 19% swoon on the heels of an earnings warning Thursday drove a 5% selloff across the banking sector.

Empire-Building

"The problem is that many banks don't have the highly priced stocks needed to make acquisitions and they are more focused on fixing businesses than building out their empires," says Eric Ball, manager of the America First Financial Institutions fund, a hedge fund based in Omaha, Neb.

A handful of deals provide a good taste of how intense this chase is getting. Earlier this month, Liberty (L), the U.S. fund manager, announced that it's taking over Wanger Asset Management, paying as much as $450 million for $7 billion in assets. The price works out at 6.4% of assets under management, a number many analysts deemed to be very high.

In May, Unicredito, Italy's second-largest banking group, spent $1.2 billion in cash on the Pioneer Group (PIOG). The per-share price that Unicredito has agreed to pay was a massive 40% above stock price on the trading day before the deal was announced. And as many as five insurance companies were interested in buying Pioneer, says Tony Ursano, an insurance industry investment banker at Banc of America Securities.

German financial giant Allianz finalized its purchase of Pimco Advisors for a hefty $3.3 billion in May. This month, Charles Schwab (SCH) closed its acquisition of U.S. Trust, which had $65 billion in assets under management. Schwab, using its highly valued stock as a powerful currency, paid a dizzying 60% over U.S. Trust's share price on the day before the deal was announced in January.

Weak on the Fundies

France's CDC Asset Management said Friday that it plans to buy Boston-based asset manager Nvest (NEW:NYSE) for $1.9 billion in cash, effectively paying a 100% premium to the firm's closing price Thursday.

Nicholas Applegate has put itself on the block, retaining Goldman Sachs as its banker. Germany's Commerzbank is looking to buy a U.S. asset management firm with about $60 billion in assets, retaining Merrill Lynch and Putnam Lovell as investment bankers, according to the Financial Times Friday. And, of late, stock market listed asset management companies have risen sharply, due largely to M&A speculation. For example, Waddell & Reed (WDR), Neuberger Berman (NEU) and Federated (FII) are up 79%, 63% and 66%, respectively, since the beginning of the year.

T. Rowe Price (TROW) and Amvescap (AVZ), which owns the Invesco and Aim brands, have also posted respectable gains. And four small-to-medium-sized privately owned fund companies are receiving takeover overtures, according to a New York-based financial services investment banker who requested anonymity.

Plenty of big banks could want in on this game, due to their relatively low level of U.S. mutual funds. For example, Bank of America (BAC), the nation's second-largest bank, has long-term mutual fund assets totaling $24 billion. That is well below Mellon's (MEL) $55 billion in mutual fund assets at Dreyfus, the $40 billion at First Union's (FTU) Evergreen and Bank One's (ONE) $33 billion. "We're interested in building our own funds, not acquiring," says a spokeswoman for Bank of America.

Dirt Cheap

The problem is that Bank of America and others, like Fleet Boston (FBF), have stocks with low valuations, trading around 10 to 11 times forecast 2000 earnings. Generally speaking, the higher the price-to-earnings ratio, the more powerful a stock is as an acquisition currency.

While many banks' stocks are hurting, foreigners are willing to come in and pay higher prices. The reason is that overseas firms "have a longer time horizon to make deals pay off," reckons Burt Greenwald, of mutual fund consultants, B. J. Greenwald Associates in Philadelphia. He believes that Europeans see the U.S. fund business as a place they have to be over the long term, and are willing to pay up to get foothold. Other European firms that might want an asset manager here include Deutsche Bank, Dresdner Bank and ABN Amro (ABN).

All that said, there are a small number of large U.S. banks that might be able to pull off a fund-management acquisition -- if they can stomach current prices. Chase (CMB), for instance, has a paltry $12.5 billion in long-term mutual fund assets that it may want to expand. A spokesman says the bank is more likely to grow its domestic asset management operations "organically." But the fact that Chase is willing to pay out a hefty $7.7 billion for the U.K.'s Robert Fleming, with sizable assets under management, is a clear sign that it cares about building up its buy-side businesses.

Then there's Citigroup (C), which has $77 billion in mutual fund assets, ranking it about 12th in the U.S. as a mutual fund company. It may want to obtain immediate top-10 clout as an asset manager through a large acquisition. "T. Rowe Price would be a jewel for Citigroup," says Greenwald. T. Rowe would appear to be a big purchase, with its $110 billion in long-term mutual fund assets. Its market capitalization is $5.2 billion, meaning its buyout price could touch $8 billion at current premiums. Still, it's hard to see a hard bargainer like Citi chief Sandy Weill paying that sort of price. Citi declined comment and a T. Rowe spokesman said his company's intention is to remain independent.

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