Bank of Montreal's $1.3-billion wealth acquisition immediately expands the bank's global reach, doubling the amount of money under the watch of its asset management group and diversifying its client mix away from retail investors.
After shelling out 120 pence per share of Britain's F&C Asset Management, one of world's oldest wealth managers, the amount of money invested by BMO's global asset management group will balloon to $269-billion (U.S.). The bank is also adding a slew of institutional clients in Europe. Currently, retail clients make up just over half of the asset management group; after the acquisition, retail will account for one-third of the investor mix.
BMO also believes the acquisition will expand its cross-selling opportunities, allowing the bank to market its existing products, such as low-cost exchange-traded funds to F&C clients, while also bringing F&C funds to North America.
The strategy is similar to what BMO deployed after acquiring London-based Pyrford International Ltd. in 2007, which historically focused on European sales. Today North America comprises 40 per cent of Pyrford's distribution. "We think we can do exactly the same thing with F&C," Gilles Ouellette, BMO's wealth management head, said on a conference call.
However, BMO has its work cut out. Despite F&C's history, the asset manager has struggled since the financial crisis, and its woes lured an activist who shook up the company. Following an aggressive cost-cutting campaign, F&C's expenses are in better shape, but the company still needs to staunch a steady outflow of client funds to pay back expensive debt.
Fifty-seven per cent of assets under F&C's watch belong to strategic partners, such as pension funds and insurers who outsourced some of their investing duties. Many of these firms now want their money back, either because they prefer to manage the funds in-house, or because their governments are forcing them to repatriate the money.
High-profile clients withdrawing funds include insurer Friends Life, which was once a £27.5-billion client for F&C, amounting to roughly a quarter of its assets under management, as well as a Portuguese pension mandate. F&C is also struggling with debt, some of which carries a 9-per-cent interest rate and comes due in 2016.
BMO did not shy away from discussing the client outflows, but declined to elaborate on whether the bank thinks the bleeding will suddenly stop. Executives simply said they baked in assumptions about these legacy clients leaving the fold, and were "realistic and prudent" with their expectations.
While F&C has some kinks to iron out, its troubles also allowed BMO to swoop in and negotiate a deal all on its own, without the competition of an auction. Chief executive officer Bill Downe said it was an opportune time to strike because the European economy looks like it is turning the corner, yet F&C's price tag didn't reflect the potential growth.
"We can see the emergence of positive economic growth in Europe," he said. "I don't think it's going to be rapid, but I think this is an opportune time from a valuation perspective."
For BMO, much of F&C's lure is the asset manager's exposure to institutional clients and strategic investors, such as insurers, who collectively make up over 80 per cent of its assets. Yet F&C also has $22-billion (U.S.) of retail assets, and there are questions as to whether BMO will keep them – especially because F&C's retail arm has struggled of late, leading to some recent executive departures.
For now BMO said it tends to grow the entire company. "We're certainly committed to all the distribution businesses that F&C has," Barry McInerney, co-CEO of BMO Global Asset Management said on the call. But the bank's immediate focus is to add to F&C's institutional sales force.
BMO's U.K. foray comes after its rivals struck similar wealth management deals abroad. In 2010, Royal Bank of Canada inked its own billion-dollar U.K. wealth management deal, while both Toronto-Dominion Bank and Canadian Imperial Bank of Commerce recently nabbed U.S. wealth management acquisitions.
Wealth management is a hot sector for Canadian banks. As developed markets recover from the crisis, investors have more reason to put their savings back into play. The more money these firms manage, the more fees they earn. Asset managers are also relatively safe acquisition targets because their revenues are fee-based, so they don't chew up much bank capital.
BMO is keen on expanding in wealth management after investing heavily in its own suite of products, particularly low-cost exchange-traded funds. The endeavour is quickly paying off, with the bank's earnings from wealth management jumping 59 per cent in 2013 from the year before.