Buyouts of money managers and mutual-fund companies have kicked into gear. Lehman Brothers Holdings (LEH) Inc. made the biggest splash on July 22 with its $2.6 billion purchase of asset manager Neuberger Berman (NEU) Inc. But other big players, from American Express (AXP) to Charles Schwab (SCH), are swooping in to buy part or all of companies that manage sizable portfolios. Citigroup, the nation's largest financial company, says it, too, is in the market. "There's a lot more stuff that hasn't hit the radar yet," says Kerrie MacPherson, head of Ernst & Young's financial services transactions group.
Why now? The biggest quarterly advance in stock prices since the end of 1998, coupled with an avalanche of new cash from investors, has given money-management firms a big profit lift. The companies generate higher fees as the assets they manage increase. And assets are soaring: Net flows into equity funds in June totaled an estimated $19.5 billion, according to fund tracker Lipper, the most since March, 2002. "A lot of managers are thinking, hey, there's some light at the end of this tunnel," says J. Christopher Donahue, CEO of Federated Investors Inc., which on July 18 bought eight mutual funds with $470 million in assets from Riggs National (RiGS) Corp., based in Washington.
The buzz ignited the stocks of publicly traded managers. The group has soared 24.5% this year through July 22, double the increase in the Standard & Poor's 500-stock index, according to financial-stock specialists Keefe, Bruyette & Woods Inc. (KBW). Many of the stocks -- including Eaton Vance (EV) Affiliated Managers (AMG) Group, and Janus Capital (JNS) Group -- hit 52-week highs in mid-July.
But have stock prices -- and the buyout bids -- raced ahead of results? Valuations remain 17% above historical averages, at nearly 19 times expected fourth-quarter earnings, says Glenn Schorr, analyst with UBS (UBS) Investment Research. "Investors may be overestimating improving fundamentals by underestimating cost pressures in the business," he says. Negatives include market saturation and regulatory uncertainty regarding disclosure and fees.
The recent deals weren't cheap. Schwab & Co. paid $365 million for State Street (STT) Corp.'s trust assets. Sanford C. Bernstein & Co. analysts reckon that works out to 3.2% of assets under management, way over the industry's median 1.9% and higher than the 2.3% Schwab paid for U.S. Trust in 2000.
The Neuberger Berman deal fetched a premium, too. Lehman paid about 4.1% of $63.7 billion in assets, making the deal one of the most expensive ever. About $120 million in restricted stock will go toward retaining key partners, who now have a bigger channel through which to sell their wares. Lehman, in turn, diversifies beyond its bond and trading strengths, which accounted for 63% of revenues in the second quarter. "Buyers are savvier and more careful today," says Robert Matza, Neuberger Berman's chief operating officer. Adds industry consultant Kevin P. Quirk, of Casey, Quirk & Acito: "These days, acquisitions are smarter; it's about retaining the culture and talent of the key people."
Financial services has been the No. 1 sector for dealmaking since 2000. So far this year, there have been $35 billion in transactions, but Lehman's is the first megadeal, according to Eric C. Weber, a consultant at Freeman & Co., a New York investment bank specializing in financial services. Most of the activity, he says, will center on boutique firms. "I don't see a lot of other deals this size in the pipeline," says Weber.
That may well be so. For starters, only 13 of the top 50 asset managers are pure plays. Just seven are public companies, including San Mateo (Calif.)-based Franklin Resources (BEN) Inc. and Baltimore's T. Rowe Price Group (TROW) Inc. Others, such as State Street and Eaton Vance Corp., vociferously proclaim their independence. "I'm not sure that many of them feel the pressure to sell," says Robert Lee, a KBW analyst.
Still, the flurry of activity has observers wondering who's next. Future deals likely will be struck to broaden product mix or pick up cheap assets at battered firms. Even though it lost a raft of key managers, the once white-hot Janus still manages $150 billion in assets -- making it an attractive target.
Superregional banks such as Wachovia (WB) Bank One (ONE), and Bank of America (BAC) are the prime likely suitors. "They have the balance sheets, and they can pay the premiums," says Bob Stein, chairman of global financial services at Ernst & Young. Speculation is also swirling that insurance and other financial conglomerates could spin off their asset-management arms. UBS's Schorr says there's lots of potential, since 39 of the top 50 asset managers are owned by big players. According to industry insiders, New York insurer Marsh & McLennan (MMC) Cos. might sell Putnam Investments. The fund family had outflows of $15.7 billion last year and $5.6 billion so far in 2003, making it one of the most challenged in the industry. A spokeswoman for Marsh & McLennan says there are no plans to sell Putnam.
But for the right price, just about anyone -- even if they're not officially for sale -- could cave. "I haven't been granted the right to just say no," says Federated's Donahue, who sold his company once before to Aetna (AET) Inc. in 1982 for $256 million. (He bought it back 14 years later.) If the market keeps it up, managers like him may see some more hard-to-refuse offers coming their way. By Mara Der Hovanesian in New York