Comerica Inc. said a lack of scale prompted its deal to sell its proprietary defined contribution plan record keeping business to the Wachovia Bank unit of Wells Fargo & Co.
"As we looked at the business mix within our portfolio and institutional management business, we realized that the retirement record keeping business was really a small part of our institution overall," Curt Farmer, an executive vice president of wealth and institutional management at Comerica, said in an interview Tuesday. "We realized that this was an area where we weren't ever going to be a scale player."
Comerica had been examining the line since mid-2008, he said. "We knew the choices were either to invest heavily and try to grow this business or look for someone to divest this business to," he said. "We chose the latter."
Farmer said Comerica, like many financial services companies, is divesting ancillary businesses. "We are really trying to focus on businesses where we have scale and critical mass," he said. "We want to concentrate on our clients and businesses where we can be profitable."
The deal was announced Tuesday and is expected to close in the second quarter. The price was not disclosed.
Joseph Ready, a director of institutional retirement at Wells Fargo, said the San Francisco banking company plans more acquisitions in the retirement record keeping field. "At a time when, broadly, the industry is struggling and downsizing, we hope that this deal sends the message that we plan to be a major, long-term player in the retirement space," he said. "We will continue to invest in this business."
Its acquisition of Wachovia Corp. last year made Wells one of the 10 largest providers of retirement record keeping services, Ready said. Wells' institutional retirement group serves around 3.7 million employees and pensioners, over 10,000 companies and manages more than $176 billion of assets. Ready, who worked at Wachovia before its sale to Wells, said in an interview Tuesday that Wachovia had 2.3 million participants and Wells had 1.4 million.
He said he expects more consolidation because retirement services providers need 1 million to 2 million participants to have a profitable business. "Lesser-scale players continue to be challenged," Ready said. "The magic scale point continues to move up."
Farmer said that, for Comerica, "this was just not a significantly growing business. We just didn't have the scale. We weren't seeing the demand from our existing clients in the business bank that would have allowed us to grow this business."
Comerica, of Dallas, provides record keeping services to 250 retirement plans with nearly 100,000 participants and manages roughly $3.4 billion of assets.
Farmer said Comerica will continue to distribute third-party retirement products.
Since the fourth quarter of 2004, Wachovia's WySTAR Global Retirement Solutions division has provided administration and operation services, as well as call center services to participants in Comerica-sponsored plans.
"We wanted to make this as seamless as possible for our customers, with as little disruption as possible," Farmer said. "We looked at multiple institutions before we sold this business, but we had the preference to sell it to Wachovia/Wells because it provided the least disruption for our customers."
Ready said the acquisition would give Wells regional retirement services offices in Michigan. It has 60 retirement record keeping offices nationally and would add offices in Detroit, Lansing and Grand Rapids.
Ready said Wells plans further buyouts of smaller retirement services providers. "We want to grow the business to really develop broader scale," he said. "I think this industry will continue to consolidate and we will look for deals that make sense."
Analysts said they expect banks to continue to divest ancillary wealth management businesses. Ready agreed. "It is a sign of the times given the challenges in the market and the investment that is required in any business," he said. "Look at the 30 largest retirement record keeping providers and you are going to start see some pretty big scale differences between the top 10, the middle 10 and the next 10. I think people are going to have to make some hard decisions."
Farmer said "ultimately it is all about scale and identifying businesses where you can be profitable. This was definitely a scale issues here."