If you can't build it, buy it. That's the principle guiding the banking industry's growing fascination with acquiring mutual fund companies.
Mellon Bank Corp.'s aborted bid to acquire Dreyfus Corp., revealed last week, is just the tip of the iceberg.
Some two dozen other big banks are getting serious about expanding through acquisitions. Only a handful of deals have closed so far, but the pace is expected to accelerate.
"It's chatter, chatter, chatter, but faster and faster," said A. Michael Lipper, president of Lipper Analytical Services. Summit, N.J. "There's a lot of discussions going on."
Among the most serious shoppers are Shawmut National Corp., Barnett Banks Inc., Chase Manhattan Corp., and Bank-America Corp. First of America Bank Corp., Wells Fargo & Co. and Banc One Corp. are also said to be on the prowl.
Likely Targets
What fund companies are the likeliest targets? "Anyone who's losing market share," according to Mr. Lipper. He said Dreyfus fits that description, as do Colonial Mutual Funds and the Pioneer Group Inc., both of Boston.
Also vulnerable are an array of fund companies with $3 billion or less in assets under management, according to Geoff Bobroff, a Denver-based mutual fund consultant.
These companies are up against fierce competition in a business that has grown geometrically, and their operating costs may be too high to let them stay independent, he said.
The talks between Mellon and Dreyfus came to light last Thursday, when Dreyfus announced that it had terminated discussions with an unnamed financial services company. The Wall Street Journal on Friday identified the buyer as Mellon.
Ambitious Goals
Though the talks failed, they provided firm evidence that banks are aiming high in their quest to build fund assets.
Dreyfus is one of the nation's largest fund companies, with $85 billion in assets under administration. The entire banking industry, by comparison, managed $200 billion in fund assets as of Sept. 30, according to Lipper Analytical Services.
Till now, banks have focused their energies on small mutual fund companies. In March, Chase Manhattan acquired the Olympic Funds, with $120 million in assets. And last month, First Union Corp. announced that it had signed a deal to acquire the Evergreen Funds, with $3.3 billion in assets.
Banks are looking for recurring sources of fee income, and managing mutual funds "is an excellent way of achieving that," said Richard Stierwalt, chief executive of Concord Holding Corp., New York.
Rich Distribution Channel
And the attraction works both ways, Mr. Stierwalt said. To mutual fund companies like Evergreen and Dreyfus, which don't have their own sales forces, banks represent "the most lucrative distribution channel, made up of savers who have not yet converted to investors."
But as relative newcomers to the mutual fund business, banks are still trying to build fund assets and flesh out product lines.
Acquisitions have become more important, because many banks have already tapped easy growth by converting trust assets into funds, said Donald Smith, a lawyer with Kirkpatrick & Lockhart, Washington.
Growing rapidly through retail sales is difficult, so "one of the ways you play catch-up is through acquisition," he said.
Logical Strategy
One industry source said banks are just doing what comes naturally. "It's no different from expanding your core banking business. Nobody starts branches de novo; they acquire other banks."
Banks do face some roadblocks. Fund company stocks currently trade at much higher price-to-earnings ratios than banks stocks, meaning that acquisitions financed with stock might significantly dilute earnings per share. "The recent sell-off in bank stocks has really hurt," the source said.
In addition, there are cultural hurdles. Mutual fund companies and banks have very different approaches to compensation, cost cutting, and perks.
But legal obstacles, once considered formidable, have all but vanished. Regulators have gradually eased the rules for banks that run mutual funds.
Banks that acquire fund companies would have to turn over the job of marketing the funds to an unaffiliated distribution company. But banks that manage their own funds already have such relationships.
High purchase prices and fear of a market decline may not be enough to stop a banking industry that is awash in cash.
"They want to get in so bad that they're raising prices," Mr. Lipper said. "At some point, there will be the top-of-the-market, high-priced deal, and the odds are that a bank or a foreign institution is the buyer."
"With the amount of money banks have, they'll be the only ones willing to pay the prices these companies want," said Neil Bathon, president of Financial Research Corp., Chicago.
