United Asset Management
has been a model of mismanagement during the Nineties bull market, say its critics. Its stock price and its assets under management have languished even as assets at other firms have skyrocketed. As a result, it should come as no surprise that Old Mutual
, UAM's acquirer, has only half the heft in assets under management than UAM and was able to pick up the firm at a bargain price.
At just 1.2 percent of assets under management and 7.3 times EBITDA, UAM was a steal compared to many recent transactions. Of course, there are reasons why the price was relatively inexpensive. UAM had been unable to find a buyer for Pilgrim Baxter
, its crown jewel, which implied that management would not be able to sell its affiliates piecemeal. It has also been hemorrhaging assets under management. Ten percent of its assets have evaporated during the past year.
, group finance director for Old Mutual, admits that the problem of negative cash flows will not disappear anytime soon. "We expect that that process is part of what we are buying," he told analysts yesterday. Staunching the slow bleed of clients and assets must be at the top of Old Mutual's to do list though.
For its part, UAM's management blames the loss of clients on the vagaries of the market, not its own problems. James F. Orr III
, United Asset Management's president and chief executive officer told analysts that the loss of clients was mostly due to shifts in the marketplace as clients shifted to managers who focused more on technology stocks. He is aware though, that UAM had a broken business model.
"Our model worked beautifully for a decade," Orr told the MutualFundWire.com. "Over the last five years the model has not worked because we have been unable to get horizontal distribution. We have been unable to appropriately leverage the affiliates," he elaborated.
The solution according to Orr, is to create "value horizontally" across the affiliates. In other words, UAM needs to bundle the services of its managers together to enable the holding company to gain efficiencies in sales and marketing. Orr admits, though, that this task is "something we have just not done."
Yet Old Mutual's Antsee believes that the European company will be able to spur exactly these changes. In his opinion, Old Mutual is the "catalyst" that will spark the implementation of the needed changes. Indeed, it did not enter into this transaction lightly and has spent the past nine months working on a detailed plan for its new unit, Antsee told the MutualFundWire.com.
"This was always going to be our prize acquisition," Antsee admitted. He added that the plan is "very affiliate specific".
"We're working with each of the 42 affiliates and looking at the economics and the revenue sharing agreements that are in place and working with each one in terms of working out the future," he explained. As part of the process Old Mutual has met with more than twenty affiliates representing 80 percent of the firm's assets already.
Antsee also said that it is putting together a team of senior executives in London to work with executives from its Boston unit over the next year to put the plan in place. He explained that "working with Boston can change a lot of things within the UAM affiliates and add a lot of value."
The plan needs to address three challenges:
First, Old Mutual plans to take a hard look at each of the UAM affiliates, determine its role in the company, and renegotiate the revenue sharing agreements that were first negotiated when the firm's were purchased by UAM.
"We will revisit revenue sharing arranged under the original agreements," confirmed Antsee, adding that they will be working with the affiliates to understand the fit with each firm. "We will look at the future of each of the affiliates in a lot more detail in terms of how they will fit and what their future aspirations and objectives are," he said. At this point he added that Old Mutual doesn't know if they will be spinning off any of the companies. That is "something that they will be looking at over the next few months."
"We now have a revenue sharing program," Anstee elaborated. "We want to make sure that they [the managers] have the right kind of incentive programs for the second and third generation managers." One way to do this is to reincentivize managers with equity, he said.
"We want to put equity back into their hands. They are extremely talented managers who have other opportunities." One way for Old Mutual to accomplish this would be to use its own stock as an incentive. Anstee points out that the stock is already listed in the U.S. as an ADR. Orr agrees, saying that the affiliates management needs to take back a piece of ownership in the business.
The goal of the new revenue sharing and incentive arrangements will be to encourage managers to get on the same page as the holding company and to motivate them to work more closely in an integrated company.
The second challenge facing UAM is distribution.
"Distribution is probably the single biggest challenge that UAM has," Orr admits. "UAM is a holding company and all of the various affiliates operate independently," he explained. As a consequence of this model, UAM has been trapped in a horizontal distribution model and has been unable to leverage the diverse asset managers as well as it needs to.
The plan is to create a multi-star distribution strategy. This means taking the strongest brands and managers and bundling them in a way that can be sold "coast-to-coast" in the U.S., said Anstee. "Investment managers are a rare commodity and very hard to find." The key for Anstee is linking the management of the funds with the distribution efforts.
Orr claims that Old Mutual has already identified the affiliates that they would like to work more closely with at a group level to put the multi-star capability in place.
Still, one unknown in the strategy is how Old Mutual will brand the affiliates. Anstee claims that no firm decision has been made on branding and that Old Mutual is aware that it needs to develop a brand strategy.
The third challenge UAM faces, like all asset managers, is staying on top of the rapid change in technology. "We need to invest in technology," Orr concluded. It appears that UAM will be relying on Old Mutual and its global systems for help. Old Mutual is "deep and strong" on the technological side Orr claims.
One question raised by these issues is the managers at the affiliates greet the changes implemented to meet these challenges. Orr and Anstee both believe that there will be little turnover because of the acquisition. In part, their confidence is grounded in their efforts to meet with key managers at affiliates as the rebuilding plan was being created. Orr also points out that if the carrot fails, most of the managers are covered by employment agreements.
Anstee also pointed out that Pilgrim Baxter's Harold Baxter
sits on UAM's board and was able to vote for the merger at the director's meeting last Friday. At the meeting he voted "enthusiastically" for this transaction. For its part, Old Mutual says it has no plans to put Pilgrim Baxter back on the block. Anstee claims he Old Mutual is very excited" to have Pilgrim Baxter and that he sees it being "a valuable part of Old Mutual family."
The other issue, of course, is whether clients will wait around for the changes to take effect. Orr does not see this as an issue. "Investors do not leave a manager because of a change like this," he argued.
Just in case they do, or if a number of key managers at affiliates bolt, Old Mutual has built some insurance into the deal. Provisions of the deal call for the sales price to ratchet down if revenues at UAM falter. Shortfalls caused by market fluctuations are not part of the trigger.
"The mechanism is dependent on revenues," explained Anstee. The trigger is pulled if revenues fall below 85 percent of their current run rate. As a rough measure of where this trigger stands Anstee told analysts that the current run rate based on EBITDA is $300 million.
"UAM is a very strong revenue generator and we will be able to pay down the debt generated by the deal very quickly," Anstee said. "We set a 12% post-tax hurdle rate and this comes below that."
No wonder Europeans are shopping stateside this summer.
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