So go the famous lyrics from the Doobie Brothers’ iconic 1972 song about tearing down the road at full throttle.
Slightly different but along the same lines is the apt title for Jefferies & Company Inc.’s February analysis on merger and acquisition (M&A) activity in the asset management, broker-dealer and financial technology industries, On the Road Again. (Click here the download the full report.)
The implicit message is that M&A activity is once again on a tear, at least with respect to so-called “mega-deals” – transactions between asset managers with more than $75 billion under management. By Jefferies’ count, there were 11 such transactions last year, a record compared with five in 2008 and six in 2007.
That even as the total number of deals announced in the asset management sector in 2009 slipped to the lowest in seven years (see chart below).
For the alternatives space in particular, the wave of outflows that plagued the industry for more than a year and a half finally ebbed as survivors emerged and performance rebounded, but transaction activity remained subdued, with only 37 alternative deals announced during 2009, nearly 50% below the 2008 total, the report said. The average transaction size reached a five-year low as many deals involved distressed businesses.
What the flurry of activity suggests is what many, including Jefferies, have been noting for some time: that banks and other financial institutions, after tripping over themselves to bring entire hedge fund operations under their umbrella at double-digit multiples and perks galore, are now looking to offload their acquired assets – either to focus on their more core businesses or to manufacture and distribute investment products themselves, Citigroup’s potential sale to SkyBridge Capital, being a classic example.
(Click here for our analysis of Jefferies’ January M&A forecast.)
So how fast is M&A activity going? For the year, financial firms divested asset managers with more than $3.6 trillion in AUM, three times greater than any prior year in history, with 40% of the 2009 total due to BlackRock’s $13 billion purchase of Barclays Global Investors, according to the report. Divestitures accounted for a record 56% of the deals announced and 90% of the total AUM transacted in 2009.
Notable, however, is that the deals are still being driven by the big boys, with independent managers sticking to the sidelines, except those looking to retire “given anticipated changes in capital gains tax rates and improving market conditions, asset flows and pricing,” the report says.
Among other highlights in the report:
- A surge in stock prices. Share prices of global publicly-traded asset managers rose, on average, a whopping 73% in 2009, tripling the returns of the broader stock market indexes. Public multiples snapped back from all-time lows in early 2009 to long-term average levels by year end, fueled by a more stable global economy, aggressive cost cutting and expectations of continued improvement in industry fundamentals.
- Only average trade-sale multiples. Average trade-sale multiples were not as resilient, reflecting the leverage buyers continue to hold and the generally mixed quality of businesses that traded during the year. Median rolling four-quarter run rate EBITDA multiples fell to 8.0x in the fourth quarter, a new low. Premium businesses, however, continue to attract double-digit EBITDA multiples.
- A re-opening IPO window. After an 18-month drought, the IPO window re-opened, albeit just a crack. Two sizable managers – Artio in the US and Gartmore in the UK – tapped the public markets in late 2009, raising $1.2 billion in aggregate proceeds. Key motivations include fewer strategic buyers, a sustained and sizable gap between public market and trade-sale multiples and a desire by principals to retain operating control of their firms.
Looking to 2010, improving business fundamentals, more stable economic conditions, steadily rising multiples, a growing recognition that asset raising will be increasingly difficult for smaller firms and the realization that building first-rate distribution is an increasingly costly endeavor will all drive M&A activity, the report concludes.
For alternative asset managers in particular, the deal flow could potentially speed up significantly if the current push among legislators to force banks to limit proprietary trading and private equity investing comes through, which would almost literally invoke giant “for sale” signs among most of the major banks and investment houses.
We’ll take that as one for the “good news” column for alternatives, though we certainly hope the rest of the rockin’ down the highway lyrics don’t foreshadow something more onerous in the making:
All the way in town they can hear me comin’ / Ford’s about to drop she won’t do no more / And I smell my motor burnin’ .. underneath the hood is smoke / Can’t stop, and I can’t stop / Got to keep on movin’ or I’ll lose my mind ..