It has been a record year for asset management deals, and banks continue to adjust to a changing landscape that could see more of them leave the business, banking and investment analysts said.
The deal that Bank of New York Co. Inc. and Mellon Financial Corp. announced Monday significantly raised the value of such deals this year, but that transaction is a bit of an outlier, because it involves the merger of two companies rather than one company's exit from a business line.
Still, Burton Greenwald, a Philadelphia consultant, said the deal was representative in some ways of a movement toward consolidation in which a half-dozen or so very large firms, like what would become Bank of New York Mellon Corp., would continue to manage and sell proprietary products while most other companies would retreat from the business.
"Asset management raises more issues than it solves," Mr. Greenwald said.
Those issues range from recruiting and retaining managers to persuading skeptical, increasingly knowledgeable consumers to buy investments managed by the institution selling them, he said.
"The midsize banks are going to exit the business for the most part," he said. "You can't sustain proprietary product and push it through a captive sales organization. It just doesn't work in an era of open architecture."
Large banking companies like Bank of America Corp., JPMorgan Chase & Co., and Wachovia Corp. are likely to remain in the asset management business and even buy more investment shops, particularly if they can expand their distribution outside the bank channel, Mr. Greenwald said.
Wachovia expanded its outside distribution, for example, through its 2003 joint venture with Prudential Financial Inc.
Asset management firms are certainly in demand. As of mid-November there had been a record 167 transactions this year, according to National Bank of Canada's Putnam Lovell NBF Securities Inc. The previous record of 159 was set in 2004. This year's deals involved a record $1.414 trillion of assets.
This year's 10 biggest deals include the one in which Merrill Lynch & Co. Inc. exchanged its investment management business for a stake in BlackRock Inc.; BNP Paribas SA's strategic partnership with Fischer Francis Trees & Watts Inc. of New York; and Mellon's purchase of the Scottish firm Walter Scott & Partners Ltd.
The Bank of New York-Mellon deal is the largest in asset management history by deal value (Mellon had a market cap of $16.5 billion as of Dec. 1) and by assets under management (Mellon had $918 billion as of Sept. 30), according to data compiled by Putnam Lovell.
"It seems that commercial banks, if 2006 is any indication, believe that asset management has a place" in their organizations, said Ben Phillips, Putnam Lovell managing director and head of strategic analysis.
But bankers, who rushed to acquire asset management firms in the 1990s, have been doing as much selling as buying recently, Mr. Phillips said. "The general trend has been that for every Washington Mutual that goes out, there's a City National that comes in."
Washington Mutual Inc. agreed in July to sell WM Advisors Inc., the manager of the WM Group of Funds, to Principal Financial Group for $740 million. In March, City National Corp. bought Independence Investment LLC, which manages $7.5 billion of equities, from Manulife Financial Corp.
Those that have bought asset managers want to build reputations as trusted advisers offering a range of services and products, but the buyers are taking care to hold the managers at arm's length, Mr. Phillips said.
Denise Valentine, a senior analyst at the Boston consulting firm Celent LLC, said that banks, mindful of recruiting challenges, increasingly are giving acquired investment units lots of autonomy.
"There is a tendency not to want to interfere," she said.
And Mr. Greenwald said that to the extent that assets flow from bank customers to the in-house managers, they are being made to earn it by outperforming outside funds.
Ms. Valentine said the consensus periodically has swung back and forth about whether organizations should manage and distribute investments, or whether they specialize in one of the two.
Bankers now seem divided on the question, resolving it on a case-by-case basis, she said.
"We have folks that take both views. It can depend on the skill sets of a company's leaders and staffing."
