Marshall & Ilsley Corp.'s acquisition of a majority stake in Taplin, Canida & Habacht Inc. of Miami in December is going exactly according to plan, according to an M&I executive. But analysts say it likely will be the last acquisition of its kind for a while as banks become sellers rather than buyers in the investment business.
As the majority owner of the institutional fixed-income specialist, which had $7.5 billion of assets under management at the end of September, M&I has been able to expand its investment offerings and become "more attractive to existing and future institutional clients," said Tommy Huie, the chief investment officer of the Milwaukee banking company's investment management arm.
Analysts say banks likely will start selling their investing businesses once the market stabilizes.
"By and large, the larger financial institutions will be sellers of their asset management businesses over the next couple of years," said Aaron Dorr, a managing director at Jefferies Putnam Lovell, a division of Jefferies & Co. Inc.
The divestitures will come "out of pure necessity to raise capital or as part of a general back-to-basics business model," said Dorr, co-author of a recent report on asset management mergers and acquisitions for Jefferies Putnam Lovell.
Dory Wiley, the president of Commerce Street Capital, agreed. "A lot of banks are overleveraged; they've got a lot of off-balance-sheet businesses," he said. "It's as simple as selling businesses to get cash and de-lever."
Dorr said most deals are likely to start materializing once the market has settled down. The Jefferies Putnam Lovell report, published in February, predicted that financial institutions will start selling their investment divisions under pressure before the year is out.
"In these markets," Dorr said, "only really distressed owners are selling. But as markets settle, we think a larger set of sellers can set their strategies for the next several years and conclude that it's better to sell or find a partner."
It is tough to sell an asset management unit in times like these. With their asset bases shrunken and their clients trickling away even as their fixed costs remain, managers' sale prices today could easily be half of what they were a couple of years ago, Dorr said.
Since many financial institutions' balance sheets are in poor shape, the main buyers are likely to be private-equity firms and pure-play asset managers, he said.
Wiley said asset management is a scale-driven business, and he expects consolidation.
Dorr said sales by banks, insurance companies and broker-dealers would be a marked change of direction for the industry; historically such institutions have accounted for as much as half of asset management acquisitions.
"There are some who will continue to be buyers," he said, "but we think most are now sellers."
Marshall & Ilsley's purchase of the majority stake in Taplin Canida was the only strategic acquisition in the United States last year by a bank, insurer or investment bank for a third-party asset manager with more than $5 billion of assets under management, according to the Jefferies Putnam Lovell report. There were eight such acquisitions in 2007, the report said.
If banks do sell en masse, it may be in part because it will be difficult to wring more earnings out of them. Fully developed asset management units typically contribute 5% to 15% of a parent bank's earnings — and most are closer to 5%, Dorr said.
For the eventual buyers, however, banks' asset management businesses might prove less appealing than independent managers, because bank-owned managers tend to rely on their parent for distribution, he said. "From an acquisition point of view, that makes them less attractive than third-party businesses, because you have to find a client base elsewhere," he said.
Merger and acquisition value in the global asset management industry fell to $16.1 billion last year, from $52.1 billion in 2007, according to the report.
