Buying a mutual fund company isn't the only game in town for banks that want to expand their asset management businesses.

Over the past year, no fewer than eight major banks have announced plans to purchase a less visible but equally appealing type of company: institutional money management firms.

Last week, PNC Bank Corp. announced the biggest deal yet, an agreement to buy Black Rock Financial Management, a New York company that manages $23 billion in primarily fixed-income assets. The Pittsburgh-based banking company agreed to pay $240 million in cash and notes.

A Better Strategic Fit

PNC and others have found that money management firms are more plentiful and less expensive than mutual fund companies. They also can be a better strategic fit with banks.

"If you buy a big mutual fund company, a big part of what you're buying is distribution," said Richard C. Caldwell, executive vice president for investment management and trust at PNC.

"In our case, the predominant benefit is the investment capability."

Bank analysts are watching these deals closely. They see them as a test of whether banks will be able to stay in the game as an aging population shifts from its spending years to its investing years.

"It's all aimed at trying to capture a piece of the savings dollar," said Diane Glossman, a banking analyst as Salomon Brothers Inc., New York.

The quest to diversify revenue streams is another major factor in banks' drive to buy asset management firms.

The planned purchase of McGlinn Capital Management, a local firm with $2.8 billion under management, should help Meridian Bancorp achieve a better split between interest-based and fee-based income, said David E. Sparks, the Reading, Pa., banking company's vice chairman and chief financial officer.

Buying a mutual fund company might have accomplished the same thing, he said. But, "I would speculate that there are more niche money management firms than there are mutual fund complexes."

Banks have certainly sniffed out some opportunities. "Over the past few years, they have been the most substantial group buying institutional firms," said R. Christopher Spofford, an associate at Putnam Lovell, a New York investment banking firm that specializes in money management firms.

Mr. Spofford says he sees a strong preference among banks for money management firms, and says it is a simple function of price.

'Significantly Lower Multiple'

"Institutional firms trade at a significantly lower multiple of earnings than mutual fund companies," he said.

Mr. Spofford placed the price of these firms at six to eight times pretax profits, versus nine times pretax profits for mutual fund companies.

Experts say one reason the prices for money management firms are so much lower is that the institutional business is by its nature more volatile than the mutual fund business.

Institutional investors tend to move their money quickly as they chase yield, while mutual fund investors tend to ride out market bumps.

Furthermore, the institutional business is seen as the low-growth segment of the asset-management world.

That's because much of the institutional business revolves around old-fashioned pension plans, known in industry jargon as defined-contribution plans.

The pension business is moving away from these plans, which involve high financial risk for the companies that sponsor them, and toward defined-benefit offerings such as 401(k) plans, which shift the risks to investors.

Mutual funds have emerged as the investment of choice for 401(k) plans, so fund companies are seen as having strong growth potential.

So are banks making a big mistake by buying into a low-growth segment of the asset management business?

Absolutely not, Mr. Spofford said. While money management firms lack the growth potential of mutual fund companies, they have other things banks seem to want: "recurring revenues, high margins, and tremendous economies of scale."

The money management business, he said, "has the organic growth of the capital markets underlying it." If markets perform well, assets grow, "and your new business drops to the bottom line."

For banks that really stick with money management, the new units could ultimately be stepping stones to mutual fund management, he added.

But whether banks will retain their interest in the field is very much an open question.

"Many banks owned money management firms and sold them off in the late 1980s," said Geoffrey H. Bobroff, a mutual fund consultant in East Greenwich, R.I. Among them: Citicorp and BankAmerica Corp.

"They've got to be in this for the next decade," Mr. Bobroff said.


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