A money management outfit is a great business to own -- except for a bank or brokerage. That's the lesson from the recent news that Merrill Lynch & Co. (MER) Chief Executive Stan O'Neal is merging the company's $539 billion asset management unit into BlackRock Inc. (BLK), run by CEO Laurence D. Fink. For BlackRock the move represents a chance to diversify its bond management business into equities. Merrill takes a near 50% ownership stake in a lucrative and growing business with $1 trillion in assets under management.
Wall Street watchers expect more deals soon. Still reeling from the aftermath of a mutual fund scandal in 2003 that shined a harsh light on the practice of retail brokers pushing their firm's mutual fund products over those of others, many companies are deciding that owning a money management unit is more trouble than it's worth. True, money managers enjoy some of the highest profit margins in financial services. And, with baby boomers retiring just over the horizon, growth prospects look excellent. But these days, "if an investor asks, [companies] have to tell them they give their brokers higher payouts and Ferraris to sell in-house products," says Eric C. Weber of Freeman & Co., a boutique mergers-and-acquisitions advisory firm. "Investors don't like that."
O'Neal isn't the first Wall Street big shot to want out of money management. In December, Baltimore's Legg Mason Inc. (LM) bought Citigroup's (C) $437 billion asset management business in exchange for its brokerage in a $3.7 billion deal. "The two biggest retail brokerage distribution companies in the world have done the same thing," says Gary Shedlin, an investment banker in Citigroup's financial institutions M&A group, which advised BlackRock on the Merrill Lynch negotiations. "This deal is affirmation of a logical trend that will continue."
The only question seems to be which company will be the next to bail out or merge. Many think it will be Morgan Stanley (MS), which has a large brokerage force and was outbid by Merrill for BlackRock. Don Putnam, managing partner at Boston-based consulting firm Grail Partners LLC, expects three or four major brokerage firms and banks to sell off their asset management units in the next 18 months. Among them: Bank of America Corp. (BAC) and Wachovia Corp. (WB) Insurer Marsh & McLellan (MMC) might also want to unload its Putnam fund business, while Mellon Financial (MEL) could sell Dreyfus (DNM).
WHO'S ON THE PROWL?
Buyers are in the wings. JPMorgan Chase & Co. (JPM), which has no retail brokerage unit, intends to build the company's money management group partly by acquisition. Another promising bunch may be publicly traded asset managers. These firms are "generally flush with cash, and many are looking for incremental acquisitions to fill out product lines," says Keefe Bruyette & Woods Inc. analyst Robert Lee. One company that may be on the prowl, Lee says, is San Mateo (Calif.)-based Franklin Resources Inc. (BEN).
Already, deal volume is up. By mid-2005 transactions, as measured by assets under management, were at the highest level since 2001, with 83 deals and $755 billion in global assets acquired, according to Freeman & Co. Yet there's a downside to the deal mania. Talented money managers are getting fed up with all the horse trading and starting their own firms. "For all the jockeying for who owns whom, there's going to be a lot of friction," says David Silvera of Rosemont Investment Partners LLC, an investor in private equity firms that specializes in asset management firms. Managers "want to be masters of their own destiny and don't see the benefit of being part of a larger group." Let the buyer beware.
By Mara Der Hovanesian, with Lauren Young in New York.