As head of Goldman, Sachs & Co.'s asset management industry group, Milton R. Berlinski is intimately acquainted with the banking industry's efforts to buy investment management expertise. The investment banker advised Mellon when it purchased Dreyfus and helped Wells Fargo in its recent sale of money management firm Wells Fargo-Nikko to London-based Barclays PLC. Last week, Mr. Berlinski sat down with investment products editor John Kimelman and talked about the environment for deals between banks and mutual fund or money management firms.
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Q.: What's the most surprising thing you've seen this year in the marketplace for mutual fund companies and asset management firms?
BERLINSKI: The most amazing thing is the ferocious appetite that exists on behalf of buyers. We just announced Barclays' acquisition of Wells Fargo-Nikko.
We had expected that the window might close in terms of potential buyers, but we found that the appetite remains strong and new buyers are coming in, including the Europeans, which are a great addition.
Q.: What's driving these kinds of deals?
BERLINSKI: From a buyer's perspective, people are saying, we want to build global asset managers, and as such, they are saying, we need a U.S. arm, a European arm, and an Asian arm.
Q.: At the same time, there doesn't seem to be the same ferocity for domestic banks to acquire U.S.-based mutual fund companies. Why hasn't this played out?
BERLINSKI: The reason the banks aren't playing as much is the concern about taking a big earnings dilution to acquire a money management firm.
Unlike Mellon, which was willing to sacrifice short-term earnings for a reorientation of the franchise, there are a not a lot of banks that are ready to do that. There are a lot of banks looking, but pulling that trigger and taking the dilution hit of buying a sizable firm has proven to be much more difficult.
Bank stocks trade on a certain price-earnings ratio, and unless you can demonstrate to the market that you can generate strong growth to overcome the earnings dilution, you're not going to do it.
Q.: We have been talking about banks buying fund companies, but aren't there are a lot of banks that want to get out of this business?
BERLINSKI: My prediction is that you will see a dozen or so banks - mostly the bigger banks - that will acquire and build these businesses. The smaller banks are more likely to be sellers, because developing a retail product is very expensive.
Q.: Where do you see the cutoff point in terms of the size of bank. Will, say, the top 30 banks stay in this business and those below that point get out?
BERLINSKI: I wouldn't say that no one outside the top 30 will stay in, but that's probably not a bad approach to look at it.
You will definitely see NationsBank and First Union and PNC and Keycorp, and Mellon, obviously. You have folks like BankAmerica and Wells Fargo whose strategies are evolving. Generally, the larger bank players are ready to take advantage of the consolidation in the fund business.
Q.: What will drive this consolidation, this shake-out that fund executives are talking about?
BERLINSKI: There are four factors driving it. Factor one is margin squeeze. Like every good business, when everyone gets into it, margin comes under pressure, especially when growth slows.
Two is the need for increased distribution, whether it's new domestic distribution or international distribution.
The third factor is the globalization of the business, the need to provide for diverse capabilities. And the fourth is scale. The low-cost producers will be the guys who survive.
Q.: So what do you think the asset-under-management threshold is to be profitable for non-niche bank players?
BERLINSKI: Our view of the world is that you have to be in the $20 billion-to-$50 billion range. But that bar keeps moving up, and it's moving because you have the Fidelities and the Putnams of the world who are making it very expensive to play the game. And the larger players have the ability to offer the customers diverse product capability.
Q.: Are banks shopping their proprietary fund families because they want to get out of this business?
BERLINSKI: Yes, I think banks have become more receptive to discussions about outsourcing their proprietary funds. Some will exit the business of managing mutual funds and say to the party they are selling to, "I would like you to provide the product, but I would like that product to have our bank's name and we will be just marketers and split fees.
