Over the past two years, the number of potential acquirers - bank or otherwise - of asset management firms has grown.

Recently, institutional money managers have become the acquisition target of choice for banks. One reason is that the other key group of asset managers - mutual fund companies - has been riding high. There is little pressure, even on poor managers of fund companies, to sell out.

The fund industry's growth has been fueled not only by the attraction of longer-term financial assets in a low interest rate environment, but by the increasing use of mutual funds by institutions for company-sponsored retirement plans and corporate cash management purposes.

Fund companies have been the direct beneficiaries of these structural changes boosting assets to historical levels. To say that we are currently in a seller's market would be grossly understating the case.

Despite the premiums currently being commanded, there is every indication that bank merger and acquisition activity will continue and even accelerate over the next year or so.

Just last month, Signet Banking Corp. announced plans to buy Sheffield Management Co., manager of the Blanchard Funds. The deal will boost Signet's mutual fund assets by $1 billion.

What factors are hastening the consolidation in the mutual fund industry?

For one thing, the number of mutual funds offered is now over 5,000. Furthermore, there is considerable concern within the industry as to how the "new generation" of retail investors will respond to a significant decline in the financial markets. An exodus of assets from mutual funds to the relative safety of bank deposits will speed consolidation.

In the future, well-capitalized banks may be uniquely positioned to acquire mutual fund assets from motivated sellers at what may be relative "fire sale" prices.

Most likely acquisition candidates would include firms that have lost market share, or closely held private companies with aging senior managers.

Although Dreyfus Corp. - acquired last year by Mellon Bank Corp. - fit the profile in certain respects, its sheer size made it somewhat of a surprise candidate. Generally, we would expect banks to eye firms with $15 billion or less in assets under management. "Mellon-sized" mergers are likely be the exception rather than the rule.

For all the interest in mutual funds, banks' M&A activities are clearly shifting to the institutional money management arena.

The first significant transaction of this type involving a bank was PNC Bank Corp.'s acquisition of BlackRock Financial Management, announced last June and completed last week.

The $240 million transaction makes PNC one of the largest institutional fixed-income management firms in the United States. BlackRock is keeping its name, and its founders will continue to manage the business.

PNC has focused on expanding in money management. The BlackRock purchase makes it the sixth-largest bank money manager in the United States, with $75 billion under management. BlackRock's investment capability was the predominant benefit to PNC.

BlackRock was founded in 1988 with venture capital from Blackstone Group Holdings, an investment bank. The firm grew quickly, and currently has approximately $23 billion in assets under management.

Those assets are largely in fixed-income investments, split between funds managed for institutions, including the pension plans of General Electric Co. and Chrysler Corp., and closed-end mutual funds.

BlackRock's heavy reliance on municipal and government bonds posed problems for the firm in 1994. Yet despite the turbulence in these markets and the dearth of fund launches, BlackRock was able to increase its assets under management in 1994.

PNC is not alone is pursuing institutional money managers. Keycorp recently moved to broaden its asset management capabilities with the proposed acquisition of Spears, Benzak, Salomon & Farrell. The deal will add $3 billion in assets - including $200 million in mutual funds - to Keycorp's coffers.

And U.S. Trust Corp. has agreed to buy the individual account business of J. & W. Seligman & Co., representing about $900 million of assets.

Mr. Cerulli is a principal and Mr. Casey a consultant with Cerulli Associates, a Boston-based consulting firm that caters to the financial services industry.

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