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Rating:Ryding to Auction? Not Rated 3.5 Email Routing List Email & Route  Print Print
Monday, April 02, 2007

Ryding to Auction?

Reported by Erin Kello

Is Rydex for sale? Industry sources close to the situation say it is. A spokesperson for the company declined to comment, citing the fact that these "rumors are continually bubbling in the market."

Why could a sale be happening? The most likely driver is a need for liquidity. Rydex is a small, private firm that lacks the heft to go public so, the next best thing to get CEO Carl Verboncoeur and other insiders their liquidity, would be a sale.

Rydex's direct competitors are Direxion and ProShares. At first glance would seem to be the most likely candidates for the buyout, until you look deeper. Both companies are of a similar scale and the two options they could use to effect the purchase, taking on a debt and an earnout, could be equally undesirable.

So who are the more likely buyers for the fund firm? It would have to be a public firm to have the means to make an offer sweet enough to close the deal. Let's run down the possibilities.

AMVESCAP recently bought Powershares, another ETF focused company, thus showing interest in Rydex's particular niche. They also use the same advisor-sold distribution model.

T. Rowe Price who MFWire reported last fall as one of the bidders for MFS, showing their interest in acquisitions, say sources. James Reipe, former CEO, and Gary Roche, former chairman have recently been replaced by James A Kennedy, new CEO and Brian C. Rogers, respectively. The newcomers now have the opportunity to make an unexpected and bold move to acquire Rydex.

Janus, a firm in a state of flux with copious outflows following its involvement in the Spitzer scandals, needs to make a change to get back in the game. They are also converting to the advisor sold model of distribution , compatible with Rydex. Buying Rydex would afford them with an opportunity to go after the big three, Vanguard, State Street, and Barclays. Rydex, however may be too small a bet for them.

Franklin Resources also has a history of acquisitions and is advisor sold. However it is a family run firm, with a large base of quick trading advisors, and the Johnsons are rightly conservative chess players. Rydex would surely be seen as too much of a risk to take on.

AMG seems perfectly suited to be Rydex's dance partner. They are a rollup firm who buys small fund shops looking for liquidity. They have traditionally grown by acquiring other businesses. Will they fill the spot on Rydex's card?

Cohen and Steers are REIT specialists so let's go ahead and cross them off the list.

Now it's time for some pure speculation with other public, strategic buyers with opportunity, means, and motive.

Charles Schwab recently sold US Trust for $5.1 billion and has some cash burning a hole in their pocket. Historically, Schwab has focused on managing index funds and their core customers are advisors and fund firms. They also already carry one Rydex fund channel. Count Schwab as the favorite in the race.

By the same logic Fidelity could make the bid, but being a family-owned company that does not want unnecessary baggage, Rydex probably does not look that attractive. Fido also prefers to build than buy.

In every good race you have wild cards. Here that category includes the major banks and insurance companies,along with Canadian company PowerFinancial.

The nature of Rydex brings with a market-timing liability, probably making it unattractive to both banks and Insurance companies.

Now PowerFinancial is owned by a family who loves risk. They also want to grow, particularly into the US market.

Now, we have no insight into whether any of these firms have actually approached Rydex, they are just who we here are MFWire think would be best suited to and served by the purchase.

In the interest of sportsmanship we are going to go 2 to 1 that either Schwab or AMVESCAP will end up being the buyer. How much can they expect to pony up if they indeed want to buy. Probably somewhere in the neighborhood of $420 million to $700 million.  

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