More complex asset-management deals likely: report

Date: Thursday, February 19, 2009
Author: Paritosh Bansal, UK.Reuters.com

NEW YORK (Reuters) - The asset management sector is in for more consolidation, but deals this year will likely involve complex structures and have a distressed flavor rather than transactions done for strategic reasons, a report predicts.

Transactions that involve arrangements such as asset swaps, joint ventures and complex earn-out provisions will become more common and stock will be used more often than cash, according to a report by Jefferies Putnam Lovell, the investment banking group of Jefferies (JEF.N), on Wednesday.

After a series of big deals in the last few months, the overall transaction activity is likely to fall to levels seen at the beginning of the decade, the report predicts.

Historically active buyers of asset management businesses -- banks and insurers -- will become sellers as they reassess their business models, it said.

"Pure-play asset managers, acting alone and in concert with private equity firms, will increasingly take advantage of this unique situation as commercial banks and insurance companies shed non-core investment businesses to raise capital," said Aaron Dorr, a managing director at Jefferies Putnam Lovell.

The securities brokerage industry has already seen several large deals, such as Bank of America Corp's (BAC.N) purchase of Merrill Lynch, Wells Fargo & Co's (WFC.N) takeover of Wachovia Corp, and a joint venture between Citigroup Inc (C.N) and Morgan Stanley (MS.N).

But uncertainty lingers due to the financial crisis, and its eventual cost remains unclear, the report said.

"It remains to be seen whether mega-deals struck to form even bigger financial services conglomerates such as Bank of America and Merrill Lynch can hold together given Citigroup's apparent retreat from the model," the report said.

The asset management sector is also likely to see more cross-border deals, as non-U.S. buyers look to take advantage of low prices and globalize, the report said.

In the alternative sector, such as hedge funds, deals will be driven mainly by sellers that otherwise run the risk of folding as management fees shrink, according to the report.

"Not able to generate a profit on management fees alone, these sub-scale players will be forced to find a larger partner or close shop," the report predicts.

(Reporting by Paritosh Bansal; Editing by Gary Hill)