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International -- Finance: MERGERS
`WE'VE BROUGHT BOTH COMPANIES INTO THE FUTURE' (int'l edition)
Why Invesco's purchase of mutual-fund giant AIM works
Most summers, Robert H. Graham gets his kicks shooting the rapids on the Colorado River. Now, the 49-year-old president and chief operating officer of mutual-fund giant AIM Management Group Inc. is about to embark on the ride of his life. It's a heart-pumping journey into the world's latest financial megamerger: the combination of AIM with London-based Invesco PLC.
On Nov. 4, Invesco agreed to pay $1.6 billion in stock and cash for AIM. When completed next year, the combination, to be renamed Amvesco PLC, will become the tenth-largest U.S. mutual-fund company (table). Worldwide, the two companies already command about $150 billion in assets under management, with everything from highrisk growth stock funds to tax-exempt bonds and international money funds.
Houston-based AIM is one of the fund industry's hottest companies, and clearly Invesco is banking on Graham's leadership to make the merger pay off. Graham will oversee all the new company's North American retail funds, including Denver-based Invesco Funds. Gary T. Crum, age 48, who with Graham and Charles "Ted" Bauer started AIM in 1976, will stay on to guide the new company. Invesco Chief Executive Charles W. Brady will oversee the institutional and international businesses.
SUPERIOR GROWTH. This merger is one of the largest yet in the rapidly consolidating investment-management industry, and the deal brings the total value of dealmaking to $6.4 billion so far this year. In June, Morgan Stanley & Co. agreed to pay $1.1 billion for Van Kampen/American Capital Inc. On Nov. 1, Franklin Resources Inc. completed the $610 million acquisition of Heine Securities Corp. What's driving the mergers is the need to get bigger in order to offer investors a wider range of investment and support services. The stock market seems to like the deal: Invesco shares rose 1.7% in two days after the deal's announcement.
One big concern for Invesco shareholders: Is the company buying at the top of the market? The price, 2.7% of assets, represents a premium compared with the 1.9% Morgan Stanley shelled out in June for the similarly sized Van Kampen/American Capital. One reason is AIM's superior growth rate. So far this decade, AIM's assets have grown at a 26.6% annualized rate, vs. 20.9% for the industry and 14.6% for Van Kampen, according to a report by brokerage firm Sanford C. Bernstein & Co. More important, performance is what sells mutual funds in the U.S., and that's where AIM has excelled: Eight of its 18 rated funds have earned either four or five stars, the highest ratings from Morningstar Inc., the mutual-fund data company.
AIM has something else that Invesco doesn't: a distribution system of advisers, brokers, and bankers that includes 120,000 financial advisers and more than 500 banks and brokerage houses, such as Merrill Lynch & Co. "The internal logic of the deal is very strong," says UBS Ltd. analyst Martin Cross.
But there are risks, too. AIM's best-selling funds depend on a buoyant market for growth stocks in general and technology shares in particular. A market pullback would slow fund growth industrywide, but AIM funds could slow faster than most.
ON THE LINE. The deal is not one-sided. Invesco's expanding international sales and strong back-office computer systems will fill in areas where AIM now lags, such as in administration of the tax-deferred retirement plans offered at many large companies in the U.S. Invesco already has 20 sales and money-management offices around the world, including markets such as Hong Kong, Tokyo, and Paris, while AIM had only one office outside the U.S. "Rather than trying to slug it out on our own," says AIM Chairman Bauer, "we've brought both companies 10 years into the future." In addition, the new company will be more balanced than either one alone, since it will be equal parts institutional and retail businesses. Says Brady: "We think it's a wonderful fit."
To make the merger pay off, Graham must meld Invesco's value-investing style with AIM's growth-investing style. The new company must also maintain separate products for brokers and for no-load buyers. And Graham has a lot on the line personally as well: His holdings in AIM give him a 10% stake in the new company, worth nearly $100 million. It's one case where shooting the rapids may be a breeze in comparison.By Gary McWilliams in Houston, with Heidi Dawley in LondonReturn to top