IT'S A FUND-EAT-FUND WORLD
Market jitters are causing some investors to lose their taste for mutual funds. But to those who own fund-management companies, and those who would like to, the idea of buying fund companies looks more appetizing than ever.
The new mantra in the fund world is "survival of the biggest." A mix of increasing expenses and downward pressure on sales and management fees has raised the bar for staying in the business. Fund companies figure they'll need at least $10 billion in assets by the year 2000 to prosper. Right now, there are only 37 companies with assets of $10 billion or more and 232 companies with less than $2 billion.
Smaller companies that counted on the continued buying binge of the past few years to fuel growth may now wonder how they'll get the assets to reach economies of scale. In recent months, inflows to stock funds have dropped, and bond funds actually have suffered net redemptions. Many fund companies may not have any choice but to sell out or merge with others.
BUZZ, BUZZ. GE Capital Corp.'s hot pursuit of Kemper Corp. and its prized $45.5 billion mutual-fund family has fueled much of the growing merger buzz. "People used to say you could never do an acquisition on a hostile basis, but GE has changed the tone of the industry," says H. Bruce McEver, president of Berkshire Capital Corp., an investment bank specializing in asset-management companies. "If GE gets Kemper, will AT&T be far behind?" asks John Keefe, of consultant Keefe Worldwide Information Services. AT&T declined to comment.
The most active fund buyers, however, may be banks. With slow growth in the core lending business, banks are launching their own funds, and many will no doubt want to acquire mutual-fund companies as well. Mellon Bank Corp.'s $1.8 billion acquisition of Dreyfus Corp.--which is expected to close this summer--is just the beginning. Among the 30 largest banks, notes James M. McCormick, president of First Manhattan Consulting Group, "nearly all have mutual funds and money managers on their radar screens."
Many deals will be driven by the need to add to a product line, build on increasingly important brand-name recognition, or find new channels of distribution. There is talk that Benham Group, whose $10 billion in assets is mainly in fixed-income funds, may do a deal with Twentieth Century Cos., whose $26 billion is mostly equity. Both companies declined to comment.
The need to grow is especially important to the no-load fund families, which use advertising, not brokers, to reach investors. The more assets under management, the more money that can be spent on advertising and the huge systems needed to support the increasingly sophisticated customer-service networks.
Independent load funds--those not affiliated with brokerage firms or other sales forces--have problems, too. Increasingly, they have to compete for the limited "shelf space" at securities firms and banks that sell their own and others' funds. "There's a bottleneck in fund distribution," says Kenneth R. Liebler, president of Liberty Financial Cos., which runs $7.5 billion in load and no-load fund groups. "There are more funds than places to sell them."
GOOD FITS. Companies on the prowl for acquisitions include Oppenheimer Management Corp., a $30 billion company that figures it must hit $100 billion in assets by 1998 to be a major player. "We can get to $60 billion through internal growth, but we're going to have to acquire the rest," says Chief Executive Jon S. Fossel. Kansas City Southern Industries Inc., which is upping its holding of Berger Associates to about 80%, is a likely acquirer of no-load equity funds. Even Vanguard Group's tightfisted chairman, John C. Bogle, says his firm, the No.3 fund company, will be "selectively active" in acquisitions.
Some smaller companies want to play the acquisition game, too. Lexington Management Corp. has only $1.5 billion in mutual funds but has a corporate parent, Piedmont Management Co., with money to spend on acquisitions. "We don't wait to hear that a company is on the block," says Lawrence Kantor, a Lexington managing director. "We'll approach a company if we think there's a good strategic fit."
All this mergers-and-acquisitions activity could result in an ironic twist: In the fund business, a company's growth may not come so much from its stock- and bond-picking prowess but from its ability to make smart acquisitions of other fund companies.
THE HUNTERS AND THE HUNTED
GE CAPITAL Firm is in hot pursuit of Kemper and its $45.5 billion fund family. Win or lose, GE is expected to continue on the acquisition trail.
KANSAS CITY SOUTHERN
INDUSTRIES The 81% owner of $16.5 billion Janus Capital recently upped its holding in $2.3 billion Berger Associates and seeks new acquisitions.
OPPENHEIMER MANAGEMENT This $30 billion company wants to grow to $100 billion by 1998 and needs to make acquisitions.
BENHAM The $10 billion fixed-income family has held discussions with Twentieth Century Cos., a $26 billion fund family known for its equity holdings.
COLONIAL GROUP Top executives nearing retirement age may choose to sell to a deep-pocketed buyer. The $14.5 billion firm focuses on fixed-income funds.
GT GLOBAL International boutique would be a prize for buyers that want to expand their business into the fast-growing international fund arena.
DATA: BUSINESS WEEKSuzanne Woolley and Jeffrey M. Laderman in New York