Tips and Tricks for Acquiring Asset Managers There has been a significant rise in the number of transactions, the value of transactions and the valuation of money managers which have been acquired in recent times. Not only are the stakes rising but there is now also a long history of asset management acquisitions which we can examine. I think that there are a number of lessons that should be well understood by the banks, insurance companies, foreign acquirers and private equity groups who are seeking to acquire asset managers. These lessons deserve considerable contemplation before acquiring an asset manager. While my remarks are intended for acquirers the acquirees might also reflect carefully on whether a sale is in their best interest. The first lesson is that whatever you pay the owners of an asset management firm for the acquisition – they will have forgotten how much they have already received when it comes time for their next annual bonus. The seller will continue to focus on annual income, not the up-front acquisition payment. Consider also that those in the acquired firm who did not directly benefit financially from the acquisition will also be expecting good bonuses going forward. Will there be enough cash flow to keep up the bonuses post acquisition? Second, senior people will always offer verbal promises to stay for a lengthy period but they are likely to leave the firm earlier than expected. This will occur almost regardless of the incentives that are provided (earn-outs and the like). Earn-outs and contracts can help however. Third, when a money manager sells all or part of their firm, they are implicitly confident that their timing is good – that is, they do not see a higher value for their firm on the horizon (and they know their business better than you do) and also keep in mind that they are professional buyers and sellers of stock. Fourth, synergies are hard to come by. Most acquirers assume some level of synergies on the cost and revenue side and these are sometimes harder to realize than anticipated. Fifth, the asset management firm that is acquired isn’t looking for your help in a managerial or investment sense - they have gotten by fine without your help before. Sometimes the acquiror can bring additional distribution to the table which acquirees will appreciate. Sixth, portfolio managers regularly hear about other portfolio managers with other firms who are paid more than they are. Therefore portfolio managers always feel underpaid. There is research that supports this statement. And they will look to the acquirer to fix this in the future. Seventh, portfolio managers have limited respect for general managers - they are professional cynics who evaluate managers of companies all the time. In addition, every time the management of the acquiring company speaks, it is further confirmation to the asset manager of your lack of knowledge of their particular business which confirms their suspicion of your inability to effectively manage an asset manager. Eighth, portfolio managers don’t understand general management nor do they wish to learn. If they had a sincere interest in general management they would be doing it already. This does not prevent them from opining however on the needs of the business and seeking participation in management. Soliciting their opinions is necessary. Ninth, portfolio managers want independence even if you own their firm. They don’t want general managers or other investment managers telling them what to do. Tenth, the professional staff can always just leave and take clients with them and thereby erode the value of the franchise that has been purchased. “Lift-outs” are a common occurrence in this industry. Eleven, remember that the value is in the people, not the assets under management or the company. Finally, remember that investment performance can disappear suddenly. And the acquirer must do everything in their power to prevent this but without perturbing the existing professional staff and creating a self-fulfilling prophecy. So here are some soft cultural questions that acquirers should ask of any contemplated acquisition. *How will you afford incentive compensation for professional staff in the years to come that satisfies their needs? *How do you keep senior staff on board as long as possible post-acquisition? *How can you realistically continue to build value in the acquired firm? *What if things go wrong with the acquisition – how can you make needed changes without contributing to further erosion in the value of the acquired firm? *How do you maintain the goodwill purchased and earn the respect of the acquired staff? Acquiring a money manager is not like acquiring most other firms and any deal deserves careful contemplation about these apparently soft, but in fact hard economic considerations. Russell Campbell Russell1@vzw.blackberry.net www.russellcampbell.com