Morgan Stanley Deal Signals Race for Scale at Fund Managers
(Bloomberg) - Morgan Stanley's acquisition of Eaton Vance Corp. Valued at $ 7 billion, the latest bet is that finding a great partner is vital to survival in the wealth management industry.
In light of cutthroat prices and the shift to passive fund management, companies are trying to expand their reach. Activist investors are also on the rise, which could lead to more deals in the near future.
"It's getting cold out there for fund managers," said Ben Phillips, principal at Deloitte Consulting's Casey Quirk, in an interview. "It's becoming increasingly important to find ways to stand out."
Read More: James Gorman Goes Back Hunting With $ 7 Billion Eaton Vance Deal
The value of transactions in the wealth and wealth management industry increased 47% year over year to $ 19.7 billion in the first half of 2020, according to an analysis by PwC. Nevertheless, the number of deals announced remained unchanged from a total of 113 during this period.
"It's an incredibly shrinking universe," said Elizabeth Nesvold, director of investment banking for wealth and asset management at Raymond James in New York. "There's just way too much pressure for a public company to deliver quarterly."
The pressure on small and medium-sized managers comes from the top of the industry, dominated by index fund giants BlackRock Inc., which oversees roughly $ 7.3 trillion, and the Vanguard Group, which oversees $ 6 trillion.
Nelson Peltz's Trian Fund Management LP has shares in Invesco Ltd. and Janus Henderson Group Plc, as the files show, and could lead companies to seek additional consolidation. The Activist Fund saw the dynamics of the fund management industry changing, with size and variety of products becoming increasingly important.
Eaton Vance itself is the product of deal-making. The company acquired Pelican Investment Management in 2011 and Clifton Group Investment Management the following year. With the deal for subsidiary Parametric in 2003, the company entered the direct index business and created custom portfolios for clients. At the time, Parametric had assets under management of approximately $ 4.7 billion. That has grown to nearly $ 300 billion.
According to Jim Shanahan, an analyst at Edward Jones, Parametric's specialty in custom products helps differentiate Boston-based Eaton Vance from its competitors.
"You have a pretty unique business," he said.
What Bloomberg Intelligence says:
“Morgan Stanley's bonds were upgraded by one notch by Moody's in October as the completed acquisition of E * Trade continues the bank's shift towards more stable wealth and investment management from volatile trading. The announced acquisition of Eaton Vance is a continuation of this trend. "
- Arnold Kakuda, Senior Financials Credit Analyst
Click here to read the research
Eaton Vance reported net inflows for 24 consecutive fiscal years according to its 2019 annual report. This is comparable to competitors like Invesco and Janus Henderson, both of whom have struggled to contain the outflows in recent years.
In the early days of the pandemic, T. Rowe Price Group Inc.'s chief executive officer, Bill Stromberg, predicted that accelerated consolidation could result from the resulting economic fallout. In a May report, the Boston Consulting Group said the North American wealth management industry, which oversaw $ 42 trillion last year, was prepared for further mergers and acquisitions after the health crisis.
Read more: T. Rowe CEO Says Covid-19 Crisis May Accelerate Consolidation
Even before Covid-19 ravaged the globe, major mergers were underway. Franklin Resources Inc. acquired Legg Mason Inc. earlier this year, and Invesco completed the acquisition of OppenheimerFunds in May 2019.
“We believe that the M&A wave is not over yet,” wrote Craig Siegenthaler, an analyst at Credit Suisse Group AG, in a message to clients on Thursday.
(Updates with analyst comment from the ninth paragraph.)
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