Companies that help banks sell and manage investment products have emerged as hot takeover prospects, with a surge in buying interest coming from banking technology suppliers.
This week, CUC International of Stamford, Conn., struck a deal to buy Essex Corp., a New York company that markets mutual funds and annuities through 220 banks. The $27 million cash deal is expected to close in January.
CUC is known for delivering "account enhancement services" such as travel discounts and on-line shopping services in conjunction with banks. It claims 32 million consumer relationships.
The company hopes to promote Essex's investment offerings through more than 7,000 as well as "electronically and internationally," said Walter Forbes, chairman of CUC.
The deal for Essex came on the heels of similar acquisitions by First Data Corp., Hackensack, N.J., and Bisys Group, Little Falls, N.J.
First Data's Shareholder Services Group unit recently announced plans to acquire 440 Financial Group, a Massachusetts firm that distributes and administers bank-managed mutual funds. Late last year, Bisys acquired the Winsbury Group, a bank fund distributor in Columbus, Ohio.
F. Mark D'Annolfo, a technology analyst with Adams Harkness in Boston said such acquisitions are smart strategic moves for technology-based companies.
"It's a natural extension of their activities with banks," Mr. D'Annolfo said.
Others said the transactions underscore the attractiveness of companies that have forged relationships with banks in the flourishing field of retail investment sales.
Suitors like CUC International "obviously see real potential in the marketplace," said Kenneth Kehrer, head of Kenneth Kehrer Associates, a consulting firm in Princeton, N.J.
This year, Essex will sell $3 billion of mutual funds and annuities through its 220 clients, said Kevin Crowe, who founded the company 14 years ago and will remain as chairman.
Essex, which also supplies training, compliance, and other support services, receives a share of the commissions from product sales. The income can come to tens of millions of dollars a year, industry experts say.
Technology-based firms aren't the only ones in the bidding. Mr. Kehrer said highly capitalized mutual fund companies and insurance firms are also in the market, as are investment product marketing firms that want to expand.
The interest in bank mutual fund service providers comes at a time when these companies face intense competition and growing pressure from banks.
As financial institutions grow more experienced with investment sales, they are demanding concessions from suppliers, such as price breaks, laptop computers, and systems upgrades.
"It's amazing what's going on out there," said Mark Steinberg, managing director of Allmerica Investment Services, an insurer based in Worcester, Mass. "There's a lot of price cutting, and the companies are finding banks, especially smaller ones, can be much harder to serve."
Amid such fevered competition, mutual fund service suppliers are eyeing mergers as a way to keep up banks' demands.
"It's very important as this industry grows that you have the critical resources and products that bank programs require," Mr. Crowe said.
The promise of a large payout is also undeniably appealing to entrepreneurs like Mr. Crowe who head many of the fund service suppliers. At the same time, observers say, the companies are reasonably priced, given the opportunity that they represent.
"Thousands and thousands of banks don't have these services and will need them," said Mr. Steinberg.
Mr. Crowe said he had serious discussions with half a dozen suitors before picking CUC International. Potential partners included mutual fund companies, insurers, and rival investment product marketing firms, he said.
Others says they, too, are fielding offers.
Roderick J. Halvorson, president of Independent Financial Marketing Group, White Plains, N.Y., said he has received "many inquiries" in recent months but is not seriously considering a sale.
