acquisition targets in this country without the need for outside assistance. So why is the Charlotte, N.C., colossus searching for a business partner as it plots the takeover of British money management firm Gartmore? Officials with NationsBank are keeping mum. But conversations with investment bankers suggest a myriad of reasons to hook up with a European partner, ranging from the cultural unease of operating in a foreign market to some fairly straightforward accounting issues. "I'm not surprised they've indicated that they're looking to partner, because it has both financial and strategic advantages," said Bradford I. Hearsh, a managing director at PaineWebber Inc. Last year, NationsBank established a joint venture with Gartmore - Nations Gartmore - to sell international investment products through its U.S. distribution network. At the time, the bank was also given the right of first refusal should Gartmore ever go on the block. That opportunity occurred in October when Banque Indosuez announced it intends to sell its 75% stake in Gartmore. But now that NationsBank has the opportunity to link up with one of Europe's premier money management firms, with $34.5 billion in institutional assets under management, the bank has decided to share the risk. Mr. Hearsh of PaineWebber cites an accounting issue as a reason for NationsBank's decision not to go it alone. He argued that earnings would take a hard hit because of a hefty writedown of goodwill generated by the acquisition. NationsBank is used to acquiring other banks, which have substantially less goodwill than money management firms. With money management firms, goodwill calculations are related to the investment contracts and other intangible assets. "NationsBank is going to be very sensitive to goodwill and its impact on earnings per share," Mr. Hearsh said. But, NationsBank could share goodwill expenses with a partner and have less to write off. With a market capitalization of about $800 billion, Gartmore is likely to fetch a 20% premium, bringing the acquisition price close to $1 billion, said Jeffrey Lovell, a partner in the Los Angeles office of investment bank Putnam, Lovell & Thorton. He agreed with Mr. Hearsh that earnings dilution could be a factor holding NationsBank back. "Because there is very little book value at Gartmore, the magnitude of the goodwill is greater than what (NationsBank) has experienced in the past," Mr. Lovell said. Mr. Lovell added that a stock swap was unlikely because Gartmore shareholders would be more keen on gaining cash than stock in a U.S. bank. There are other advantages to working with a partner, says a European- based bank. Such an alliance would open the door to new business for the joint venture, Nations Gartmore. "In effect ... the other party would deliver assets from other parts of the world," Mr. Hearsh said. Mr. Hearsh thinks U.S. banks are reluctant to acquire foreign money managers, which trade at higher multiples than U.S. investment firms. Other investment bankers beg to differ. "Both institutions are too intelligent and sophisticated to ... stop a transaction that makes economic sense," said Peter L. Bain, a principal at investment bank Berkshire Capital Corp. Mr. Bain argues that the cultural impediments to buying overseas may loom as the primary reason why NationsBank is seeking a partner. He thinks working out issues like how to compensate employees could inhibit the bank from wanting to run a business overseas by itself.
Save $400 off your subscription. Special offer ends April 30, 2017.
No credit card required. Complete access to articles, breaking news and industry data.
Have an account? Sign In