Asset Management Industry: Mergers and Acquisition Trends

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Asset Management Industry: Mergers and Acquisition Trends

  1. 1. Asset Management Industry: Mergers and Acquisition Trends Robert C. Pozen Chairman MFS Investment Management® March 15, 2006 FOR INSTITUTIONAL USE ONLY. 03/06 © 2006 MFS Investment Management®. 06-18454
  2. 2. Agenda Last Decade New Pressures Current Trends FOR INSTITUTIONAL USE ONLY. 1
  3. 3. Last Decade Two Peaks: 2000 and 2005 Aggregate Assets Under Management Acquired by Buyer Type Asset Manager Broker Dealer Insurance Company Bank or Trust Other $1,400 $1,300 $1,200 $1,100 Acquired AUM (US$ BN) $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 1998 1999 2000 2001 2002 2003 2004 2005 YTD 2006 Source: Grail Partners LLC and public sources as of 2/24/06.. FOR INSTITUTIONAL USE ONLY. 2
  4. 4. Last Decade Domestic Acquisitions • US fund sponsors acquired by US fund sponsors • Fill out product line • Expand into high net worth • Aggregation of asset managers • US fund sponsors acquired by banks, brokers and insurers • Expand proprietary funds to sell to existing customers • Add stable income stream to offset sales cycles • Obtain higher growth rates than in mature industries FOR INSTITUTIONAL USE ONLY. 3
  5. 5. Last Decade Cross-Border Acquisitions • US fund sponsor acquiring foreign asset manager • Large US broker-dealers fulfilling global ambitions • US bank or insurer buys manager of international assets • Fund sponsor gains manager of international assets • Foreign financial institution acquiring US fund sponsor • Acquisitions by European insurers • Acquisitions by European banks • No Asian acquirers FOR INSTITUTIONAL USE ONLY. 4
  6. 6. New Pressures Open Architecture • Retail • High net worth customers want best performance regardless of manager affiliation • Want customized investment “solutions” – platform business • Prepared to utilize different firms for banking, insurance and mutual funds • Retirement Plans • Plan sponsors want operational platform run by one firm • But plan sponsors want “best in class” funds for each subcategory of assets • Competition for rollover assets among many open platforms FOR INSTITUTIONAL USE ONLY. 5
  7. 7. New Pressures Regulatory Reforms from SEC • No special compensation to sell proprietary funds • No brokerage commissions to reward fund sales • More disclosures on • Firm revenue sharing • Broker compensation (POS) • Pressures on Management Fees • Higher compliance costs • Reductions • New York Attorney General Settlement • Index Funds: Price War FOR INSTITUTIONAL USE ONLY. 6
  8. 8. New Pressures Growth of Alternative Products Asset in $Billions 2000 2005 $1,200 $1,105 $1,000 $800 $678 $600 $488 $437 $400 $301 $200 $66 $0 Separately Managed Hedge Funds Exchange Traded Accounts (SMAs) Funds (ETFs) Source: FRC. SMA source ,MMI as of 12/31/05; Hedge Funds source, Hedge Fund Research as of 12/31/05;. ETFs source, FRC IMPACT as of 12/31/05. FOR INSTITUTIONAL USE ONLY. 7
  9. 9. New Pressure Integrated Asset Managers/Distributors Particularly Challenged Retail fund net flows of select large proprietary fund groups Net Flows ($Millions) Assets Complex Name Dec 05 2005 2004 2003 2002 2001 Merrill Lynch 61,644 -2,328 -2,270 -1,626 -2,409 -3,167 Investment Management RiverSource Investments 53,152 -9,818 -7,798 -3,939 -5,093 -1,542 (American Express) Smith Barney Asset 52,086 -4,079 -1,586 928 1,875 4,024 Management Morgan Stanley 32,244 -8,598 -8,144 -3,854 -5,828 -4,605 Investment Advisors Source: FRC FOR INSTITUTIONAL USE ONLY. 8
  10. 10. Current Trends De-glomeration: Refocus on Core Competencies Recent mega-deals viewed as mutually beneficial AUM Disclosed Target Acquirer Year (Millions) Deal Value Merrill Lynch BlackRock Financial 2006 $544,000 $9,500+ Investment Management Citigroup Asset Management Legg Mason 2005 $437,000 $3,700.0 Source: FRC • BlackRock’s agreement to acquire Merrill Lynch’s investment arm (MLIM) in exchange for a 49.8% stake in the combined company – BlackRock: gains global footprint and privileged access to Merrill’s retail distribution engine – Merrill Lynch: participation in BlackRock’s institutional and fixed income success, potential for more success with third party retail distribution • Legg Mason’s agreement to swap its 1,400 brokers for CitiGroup’s asset management arm – Legg Mason: becomes pure play asset manager, gains wider distribution, and more than doubles assets transforming into the fifth largest manager in world – CitiGroup’s SmithBarney unit re-focuses on distribution, gains additional clients and reps and opportunity to sell Legg Mason’s strong performing offerings, $1.5 billion in Legg Mason stock FOR INSTITUTIONAL USE ONLY. 9
  11. 11. Current Trends Separate Asset Management Brand Integrated Asset Managers/Distributors Seek Third Party Distribution • Morgan Stanley/Van Kampen • Acquired in 1996 • -$8,598 million in 2005 net flows for Morgan Stanley Funds versus +$3,495 million for Van Kampen Funds • Lehman Brothers/Neuberger Berman • Acquired Neuberger Berman in 2003 • Selling as separate, established brand in wirehouses • American Express • Spun out as from American Express as part of Ameriprise Financial • Rebrand investment manager as “RiverSource” • Maintain captive sales force of financial planners FOR INSTITUTIONAL USE ONLY. 10
  12. 12. Current Trends Smaller Player Acquisitions Divestiture of non-core asset management efforts • Pioneer Investments acquisition of AmSouth’s $5.5 billion in mutual funds • T. Rowe • TD Waterhouse’s $415 million in index funds • Caterpillar’s $2.9 billion in mutual funds • American Century acquisition of Mason Street Funds $1.7 billion in mutual funds FOR INSTITUTIONAL USE ONLY. 11
  13. 13. Current Trends Fund Adoption Strategy Selected mutual fund adoptions AUM at time Date Adoption AUM Adoption Announced Dec-05 Acquired Fund Rebranded Fund Announced ($M) ($M) GMO Global Evergreen Sep-02 $144 $7,758 Balanced Allocation Asset Allocation John Hancock Pzena Focused Value Nov-02 $20 $4,796 Classic Value Schroder International Vanguard International Mar-02 $26 $2,282 Smaller Companies Explorer U.S. Global Leaders Growth John Hancock U.S. Global May-02 $124 $1,720 (Yaeger, Wood & Marshall) Leaders Growth Dreyfus Premier Thompson Plumb Balanced Oct-03 $173 $896 Balanced Opportunity Evergreen High Income Davis Tax-Free High Income Dec-99 $410 $717 Muni Bond Turner Growth Equity Vanguard Growth Equity Mar-00 $270 $750 Wells Fargo C&B Cook & Bieler Mid Cap Value Mar-04 $427 $708 Mid Cap Value Source: FRC FOR INSTITUTIONAL USE ONLY. 12
  14. 14. Conclusions • Integration rationales for acquisitions in late 1990s have come under question • Pressures toward open architecture leading to de-glomeration of large integrated brands • Economies of scale leading to acquisitions and adoptions at smaller fund complexes FOR INSTITUTIONAL USE ONLY. 13

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