A frenzied race is on to buy up money management companies - but banks, which have vowed to bolster their fledgling mutual fund businesses through acquisitions, aren't making it to the winners' circle.

Banks have been outbid at every turn by investment banks, brokerages, and other mutual funds who are increasingly eager to reach critical mass in the money management business. Confident that their huge branch networks would be a boon to any fund company they acquire, banks have been unwilling to cough up the steep premiums that money managers are now commanding.

"The prices are simply too high right now," said Banc One Corp. chairman John B. McCoy. "If we bought now, we'd be looking at buying at the top of the market."

That certainly hasn't stopped banks' competitors from jumping into the mutual fund merger fray.

Two weeks ago, Morgan Stanley Group agreed to shell out more than $1.1 billion for Van Kampen/American Capital Inc., a fund company for which both NationsBank Corp. and First Union Corp. had bid. The price, a combination of cash, stock, and debt, is a whopping 8.44 times what Van Kampen's estimated earnings would be before taxes.

That same week, another investment bank, Merrill Lynch & Co., said it would pay about $200 million for Hotchkis & Wiley, a Los Angeles money manager. And mutual fund giant Franklin Resources announced plans to buy Heine Securities for up to $800 million.

Even before those three deals were announced, banks were becoming less- frequent participants in the fund merger game. During the first six months of 1996, a whopping 46 money management firms changed hands, according to Berkshire Capital Corp., New York. But commercial banks were involved in only five of those deals, getting just 18.5% of the $240 billion worth of managed assets sold.

In 1995, banks participated in 18 of 73 money management deals, buying 44% of the $458 billion of managed assets that changed hands.

Banks have become increasingly unwilling "to take some short-term dilution of their stock" to make money management deals work," said Robert Smith, a managing director in the financial institutions group at Salomon Brothers Inc. When Mellon Bank Corp. announced its landmark $1.8 billion bid for Dreyfus Corp. in 1994, its shares plunged 9%.

But investment banks and other acquirers are unfazed. They are willing to pay premiums for money managers because they can see the value in a "brandname, and management, and the fees that come from managing the assets," said Merrill H. Ross, a bank analyst for Wheat First Butcher Singer, Richmond, Va.

Franklin Resources, for example, agreed to pay a price 10 to 11 times Heine Securities' pretax earnings largely because Michael Price, the company's star investor, plans to stay on for five years.

"There is a sort of arrogance coming from the banks," Miss Ross added. "They think that (a fund company's) distribution will expand because they have the brick and mortar, and therefore they can afford to pay a lower price.

"But that hasn't been received very well by the mutual fund companies," she said.

Indeed, some critics say banks are particularly unattractive as would-be buyers. They reason: they have yet to put significant resources into the distribution of investment products.

"One of the real issues for banks in general is that they haven't put any real capital behind marketing, systems, or acquisition of talent" for their mutual fund operations, said A. Michael Lipper, principal of Lipper Analytical Services.

Peter L. Bain, Berkshire's managing principal, added that Morgan Stanley and Franklin were willing to pay a premium for their acquisitions because "each is more confident that they will be able to distribute the acquired companies' product better than a bank might.

"A bank may assume 8% growth of the funds, but Franklin would probably see 15% growth of those funds. And that would bring up the bid price," he said.

Because mutual fund acquisitions don't have immediate benefits for bank stock shareholders, Salomon Brother's Mr. Smith said he doesn't expect many banks to plunge into the merger race any time soon.

"Banks have been on the fringe of mutual funds for quite a long time when you consider the gap between the biggest fund company and the biggest bank mutual fund," Mr. Smith said. "Staying on the sidelines a little longer will not make that much of a difference."

But some experts caution that banks can't say on the sidelines forever. First Union, for instance, has said publicly that it expects to manage $100 billion of mutual fund assets before the decade ends, and that acquisitions will be part of the strategy. Other banking companies have stated much the same.

Jeffrey D. Lovell, principal of Putnam Lovell & Thornton, an investment banking firm that specializes in acquisitions of money management firms, said banks need to give mutual funds "serious attention as a engine for growth," or be buried by the competition.

"It's difficult and time consuming to attempt to buy" smaller fund companies one at a time "with the intention of gaining critical mass that way." He added that "buying a $500 million fund company isn't going to do anything for you."

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