ING Group NV's announcement last week that it had a deal for CitiStreet LLC, a joint venture between Citigroup Inc. and State Street Corp., was only the latest consolidation move in the retirement services industry.
"Retirement services businesses are still getting a high premium when they are put up for sale," said Don Salama, the senior managing director and head of retirement plan services at New York Life Insurance Co. "For every retirement plan business that is put on the block, there are 10 companies interested in buying that business. There is just a lot more demand than supply right now."
The retirement services market has been consolidating quickly in the past two years. In addition to ING's deal for CitiStreet, MassMutual bought First Mercantile Trust's retirement plan business this year, and in December Hartford Financial Services Inc. bought Sun Life Financial Inc.'s U.S. defined contribution plan administration business; Princeton Retirement Group; and Top Noggin, which offers data management, administration, and benefit calculation tools for sponsors of defined benefit plans.
Hartford's deal added $18.7 billion of assets under management in the first quarter,. It now manages $46.4 billion for retirees.
Marty Swanson, the chief marketing officer of Hartford's retirement plan group, said at the time of the Sun Life deal that the company was interested in becoming a "top 10 player in the retirement record keeping business" and is willing to consider acquiringl.
He also said Hartford bought all three firms to expand its retirement services and that a lack of scale forced all three to sell.
CitiStreet is unique as an acquisition target because it already has scale. The company is second-largest as a retirement services record keeper to Fidelity Investments, which serves 13.5 million participants, according to the PlanSponsor Recordkeeping Survey.
Rick Mason, the president of ING U.S. Wealth Management's retirement services market segments, said the CitiStreet deal lets ING significantly expand its scale and the capacity to serve larger clients. Before the deal, ING had primarily provided retirement services to small and midsize companies. Once the deal closes, which is expected by the end of the third quarter, ING would have $350 billion of retirement assets.
He said ING plans to continue expanding its retirement services capabilities. "ING clearly has a growth strategy with a focus on the retirement services business," Mr. Mason said. "Right now we want to focus on integrating these companies, but looking at other opportunities is something we are always interested in doing."
He added, "The retirement services business is always going to be one of scale, and players that can achieve that over the long haul will be successful in this business."
Last year others did deals to expand their retirement businesses. In April, Charles Schwab & Co. Inc. bought 401(k) Co., which had $21.7 billion of retirement assets, from Nationwide Financial Services Inc. in Columbus, Ohio. In November Prudential Inc. in Newark, N.J., announced a deal to buy Union Bank of California's 401(k) business, which had $103 million of assets.
Unlike the deals for defined contribution and defined benefit businesses that matched a company seeking more share with one trying to get out of the business, CitiStreet's involved companies selling a profitable retirement business in order to raise capital. We can expect more like it, analysts and executives said.
Mr. Salama said, "Companies, profitable companies, like CitiStreet are going to be sold over the next few years to help distressed parents. Companies like Citigroup and State Street are going to need to sell off assets that don't fit well in order to raise capital, given the subprime mortgage crisis."
Bloomberg News reported Thursday that State Street could face damages tied to subprime investments that could reach as high as $7.8 billion, or more than 12 times the $618 million it set aside in January to cover legal costs linked to subprime mortgage exposures.
A spokeswoman at State Street said the numbers reported by Bloomberg are inaccurate. "Taking the decline in assets under management from point to point, as represented by the Bloomberg report, is not an appropriate or accurate way to calculate potential investment losses or the company's potential exposure," she said.
The CitiStreet deal "has nothing to do with raising capital," the State Street spokeswoman said. "CitiStreet's business model of providing [defined benefit] and [defined contribution] record keeping services wasn't fully consistent with our strategic direction and focus on institutional investors."
Mr. Salama said companies like New York Life, Hartford Financial Services, Schwab, and perhaps even Bank of America Corp. are among the potential buyers.
James D. McCool, Schwab's head of corporate and retirement services, said during the company's quarterly business update that it is definitely open to more acquisitions but that any deal would have to be the right fit. Schwab, he said, which had $228 billion of assets under management in its corporate and retirement services unit, is not interested in acquiring just to add scale; it wants to buy capabilities that it currently lacks.
A spokeswoman for Bank of America said the company has spent $30 million on an ad campaign for its retirement business in an effort to expand the business organically. In July, it hired Jeff Carney from Fidelity Investments to run its retirement services and client solutions business as president. The business had $89 billion of assets under management.
"There is still a huge opportunity with our own clients to grow this business through the bank channel," she said. "We are looking to grow, and while our focus is growing through our existing customer bases, we are certainly willing to consider other opportunities to grow."
Mr. Salama said companies like Wachovia Corp. and Merrill Lynch & Co. Inc. may look to sell their retirement services businesses during the next year.
"I cannot say that they will definitely do something with their retirement businesses, but those are the kind of companies that might do something," he said.
Stephen Bodurtha, a senior vice president and the head of Merrill's $435 billion-asset retirement group, said the company remains committed to providing retirement services.
"We believe that a robust and complete retirement strategy is critical to our success as a global wealth manager," he said.
Merrill has "taken advantage of industry consolidation and specialization many times through both purchasing retirement services businesses that have met our target strategy and selling components of the business that were not aligned with our strategic goals," Mr. Bodurtha said. "We continue to seek the right opportunities to expand our retirement services business base in line with our strategic objective of a high-growth retirement business."
A spokesman at Wachovia said, "We like the institutional retirement plan business and its connectivity to other Wachovia core businesses, including retail brokerage and asset management. We have one of the strongest capital positions in the financial services industry and raised $8 billion of capital in mid-April."
Wachovia has $105 billion of retirement plan assets managed for 2.2 million participants.
Mr. Salama said New York Life, which has more than tripled its retirement assets under administration in the past five years, to $30 billion, is also interested in strategic acquisitions.
"We have established ourselves as a mid- and large-market player," he said, "and we are interested in staying in that space and expanding within it."
