Banks Were Gonna Buy Lots of Nonbanks - Remember?
Ratner, Juliana, American Banker
When it comes to buying nonbank financial companies, banks have been all talk but little action.
At the beginning of the year, many banks expressed keen interest in buying up money managers, mutual funds, mortgage companies, and other financial services firms. Even Citicorp, which usually expands through internal growth, said it was on the prowl for a money management firm.
Yet banks have been conspicuously absent from most of the major nonbank deals announced so far this year.
Many are still digesting earlier purchases of other banks, which is chilling their nonbank acquisition plans. And while banks have the capital to do nonbank deals, many have been wary of paying the steep multiples that money managers and mutual funds have been routinely fetching this year.
"If you ask bankers would they make these deals, I think they'd say they would - at reasonable prices," said Ben Crabtree, a bank stock analyst at Dain Bosworth Inc.
Thanks to a raging bull market for stocks, mutual fund deals have remained pricey far longer than anyone had expected, said William Houlihan, managing partner at Bear, Stearns & Co., New York.
Meanwhile, fewer mortgage companies are up for sale, as sellers wait for premiums to return to where they were two years ago. This has put the kibosh on many banks' plans to buy nonbank firms.
Investment bankers said they are hopeful that the situation may change by yearend. The stock market's recent downturn could make money management and mutual fund firms more affordable, they said. And more mortgage banks are exploring joint ventures as a way of getting servicing risk off their books.
But to date, 1996 has been fairly quiet for commercial banks. In the money management and mutual fund arena, large investment banks and other mutual fund companies have so far been undeterred by hefty prices.
While NationsBank Corp. and First Union Corp. courted fund company Van Kampen/American Capital Inc., they couldn't top investment bank Morgan Stanley Group's $1.1 billion bid in June.
That same week, Merrill Lynch & Co., another investment bank, announced it would pay $200 million for Hotchkis and Wiley, a Los Angeles money manager. And Franklin Resources, a large mutual fund company, said it would pay up to $800 million for Heine Securities.
These nonbank companies paid an average of roughly 9.75 times pretax earnings for their acquisitions - the going rate for money managers since 1994. Prices in that market had been on an upward trend since the late 1980s, when fund companies fetched about seven times pretax earnings, said Gregg Hazlett, director of research at Investment Counseling Inc., West Conshohocken, Pa.
With prices that high, banks for the past two years have been looking for 13% to 15% growth from the asset managers they acquire. But they have been somewhat disappointed in the deals they did make.
"Banks looking at last year's mutual fund deals found that growth at those companies isn't what the acquirers hoped it would be," said Peter L. …