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Monday, June 23, 2003

M&A Will Become More Focused

by: Sean Hanna, Editor in Chief

Fund firms have tough choices to make say the consultants at Booz Allen Hamilton in a newly released white paper. The paper is called "Asset Management: Winning Through Focus" and was authored by Mike McKeon, a vice president in the consultant's New York office and three senior associates. The paper reflects the widespread belief that the bear market is forcing the fund industry to restructure itself.

"The result [of the bear market] is a collapse in average operating margins -- percentages have dropped from the mid-30s to the low 20s -- and the realization that a significant portion of the industry is no longer profitable," write the authors.

They contend that the industry is responding to this pressure by going through a two-phase adoption. First, firms are scrutinizing their short-term operations with an eye to bolstering profitability. In many cases this means outsourcing non-core functions.

They are also making a more strategic choice of which channels to focus on and what their product line should look like. For some firms, the answer is to become a distributor and cut down on the number of products offered in order to focus on building broad channel coverage. Those firms will need to restructure their sales forces to focus on a smaller number of channels, according to the report.

"Successful firms are now consolidating and simplifying their sales organizations to eliminate overlap, in the process encouraging the model of a generalist regional sales force supported by a limited number of product specialists," says the report.

Others will focus on manufacturing and seek to develop a deeper product line while limiting client and channel coverage.

Neither of these two trends will sound foreign to those who have been watching the industry evolve over the past decade. Indeed, both trends existed before the bear market, although the stagnation of the industry's asset base has undoubtedly accelerated the trends.

In the second phase, the report predicts that the pace of M&A activity will pick up as firms complete the first two phases and discover that the only way to achieve quick growth is to buy it.

The report's authors believe that M&A activity will become more focused in the future and that it will fall into five categories. As identified by Booz Allen, the types of future M&A "plays" are: carve-out of servicing or administrative functions; lift-outs of portfolio management teams for specific products; spin-offs of asset classes, regional operations or business lines; acquisitions of a focused player to build on a profitable core and roll-ups of smaller players to bundle their offerings more cost efficiently.

One potential carve-out identified by Booz Allen is Merrill Lynch Investment Managers. Buyers in that segment include State Street, Northern Trust and DST.

Meanwhile, it picks Deutsche Bank and BlackRock as potential firms to carryout lift-outs to add into their manufacturing.  

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