Oct. 20 (Bloomberg) -- Invesco Ltd. agreed to buy Morgan Stanley’s retail investment management business for $1.5 billion in stock and cash, the industry’s third takeover of an asset manager from a bank in four months.

Invesco, manager of the Aim and PowerShares funds, will gain about $119 billion in client money including the Van Kampen unit, bringing its assets under management to about $536 billion, the Atlanta-based firm said yesterday in a statement. The purchase price includes $500 million in cash and $1 billion in stock, which will make Morgan Stanley Invesco’s largest shareholder with a 9.4 percent stake.

Invesco’s largest deal since its $1.54 billion purchase of Britain’s Perpetual Plc in 2001 follows takeovers of asset managers by Ameriprise Financial Inc. and BlackRock Inc. Morgan Stanley is revamping its asset-management businesses after the division reported six consecutive quarterly losses totaling $1.67 billion.

“I don’t think the banks necessarily still needed the cash, but the combination of increasing capital and not viewing asset management as a core business meant these deals still made sense,” D.J. Neiman, an analyst with William Blair & Co. in Chicago, said in a telephone interview.

Van Kampen had $86 billion in client money as of June 30, held in mutual funds, retirement and college savings plans, unit investment trusts and accounts for wealthy individuals managed by Van Kampen Investments in Houston. Morgan Stanley managed $44 billion in assets under its own name.

Columbia, BGI

“This combines two mid-sized firms to create more scale in an industry where we think the largest companies are pretty well positioned,” Jeffrey Hopson, an analyst with Stifel Nicolaus & Co. in St. Louis, said in an interview.

The transaction marks the third asset-management sale since June by a bank hurt by mortgage-backed securities losses. Bank of America Corp. agreed Sept. 30 to sell the Columbia stock and bond funds for $1.2 billion to Ameriprise. Barclays Plc agreed in June to deal its Barclays Global Investors to BlackRock Inc. for $13.5 billion.

Invesco, which today reported a 20 percent drop in third- quarter earnings, said it expects the deal to create $70 million in savings and lift earnings by 13 cents a share in the first year after its completion. Most of the savings will come from combining distribution platforms and locations, Chief Financial Officer Loren Starr said in a telephone interview.

Earnings Drop

“This is about adding depth and breadth to our investment- management capabilities,” Chief Executive Officer Martin Flanagan said in the interview. “This is a growth opportunity, not a cost saving opportunity.”

Invesco said third-quarter net income dropped to $105.2 million, or 24 cents a share, from $131.8 million, or 33 cents, a year earlier, the Atlanta-based company said in a statement today. The average estimate of 16 analysts surveyed by Bloomberg was 24 cents, excluding some items.

Invesco rose 18 cents to $23.30 at 4:00 p.m. in New York Stock Exchange composite trading. Morgan Stanley fell 59 cents, or 1.8 percent, to $32.52.

Flanagan said the deal includes a distribution agreement with the Morgan Stanley Smith Barney brokerage unit similar to one it already has for marketing other Invesco funds. He wouldn’t disclose terms of that agreement.

The $1 billion of Invesco stock being acquired by Morgan Stanley was priced at $22.68 a share, representing a 1.9 percent discount from yesterday’s closing price of $23.12.

Morgan Stanley’s sale of the retail funds follows the expansion of its brokerage business through the creation of the Morgan Stanley Smith Barney joint venture this year. The firm paid $2.75 billion in June to complete the agreement.

‘Long-Term Dividends’

The deal gave Morgan Stanley control over more than 18,400 financial advisers. It was likely motivated to sell by regulatory conflicts that hampered its brokerage from selling the company’s own funds, and by “sub-scale operations,” David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, wrote in a research note published today.

Douglas Ciocca, a managing director at Renaissance Financial Corp. in Leawood, Kansas, said Morgan Stanley’s decision to exit the retail funds business and stick to advising individual investors “is going to pay long-term dividends.”

Financial advisers have “more sticky money, there’s more consistency of the revenue contribution than you would get ever in asset management,” said Ciocca, whose $1.9 billion of assets doesn’t include Morgan Stanley stock.

The bank retained institutional asset management businesses overseeing $267 billion as of Sept. 30. The restructured Morgan Stanley Investment Management unit will include equity and fixed-income investing, hedge funds, funds of funds, money- market funds, real estate and private equity, spokeswoman Erica Platt said in an e-mail.

Morgan Stanley has written down $23 billion in losses on mortgage-related investments since the third quarter of 2007. The firm said in September that Co-President James Gorman will take over as chief executive officer for John Mack on Jan. 1.

Van Kampen

Morgan Stanley is likely to book a gain on the Van Kampen transaction upon completion, according to a person familiar with the deal who declined to comment publicly because those details aren’t public.

The deal has been approved by the boards of directors of both companies and is expected to close by the middle of next year, Invesco said in the statement.

Morgan Stanley bought Van Kampen, then with $57 billion in assets, for $1.18 billion in cash, preferred shares and debt, in 1996. Assets at the unit fell 32 percent in the year ended June 30, as customers withdrew a net $13.7 billion and the Standard & Poor’s 500 Index declined 26 percent. Assets in Morgan Stanley retail funds dropped 39 percent as clients pulled out $14.1 billion.

‘Not Thriving’

“Business is by no means thriving,” Neiman said. He said the success of the deal for Invesco may hinge on whether it can convince Van Kampen and Morgan Stanley customers to stay.

Invesco, which also owns New York-based private-equity firm W.L. Ross & Co., Trimark funds in Toronto and London’s Perpetual funds, reported $75.7 million in net income in the second quarter on $625.1 million in revenue.

Van Kampen’s largest fund is the $12 billion Equity Income Fund, managed by Thomas Bastian. The fund gained 18 percent this year through Oct. 1, compared with the 16 percent increase for the S&P 500, including reinvested dividends.

Van Kampen funds, divided into broad investing categories, beat 43 percent of their peers on average in the three years ended Sept. 30, according to Chicago-based research firm Morningstar Inc. Funds that invest in U.S. stocks fared best as a group, beating 66 percent of similarly grouped funds at other money managers. Taxable bond funds did worst, outperforming 21 percent of rivals.

Morgan Stanley’s Funds

Morgan Stanley funds beat 55 percent of rivals, on average. U.S. stock funds did best, topping 68 percent of their peers, while taxable bond funds beat 27 percent.

Morgan Stanley’s biggest retail fund is the $1.45 billion Focus Growth Fund, managed by Dennis Lynch. It returned 58 percent this year through Oct. 1, beating all but one of 268 funds that target the shares of large companies expected to report above-average growth in profits or revenue, according to data compiled by Bloomberg.

Invesco oversaw $417 billion as of Sept. 30, including $87.2 billion in money-market funds, according to the company. The company managed $12.5 billion in the PowerShares exchange- traded funds as of Aug. 31, according to Boston’s State Street Corp., which manages ETFs and tracks that industry. ETFs mimic indexes while trading throughout the day like stocks.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.

Last Updated: October 20, 2009 16:14 EDT