Monday, January 7, 2013

Yet Another Bank Acquires Another Money Manager

Yet Another Bank Acquires Another Money Manager

Exactly a month ago, TD Bank Group, the holding company for Canada’s Toronto Dominion Bank, announced the acquisition of Epoch Holdings, a money management firm for $668 million.  The press release announcing the deal caught my attention because it contained the virtually the same language I’d incorporated into dozens of press releases over the course of my career.  In fact, almost every money management transaction every undertaken in the history of the business sticks to the same formula.  There’s always a statement from each side of the transaction that says a bunch of nice things about the other party.  Here’s William Priest, one of the founding fathers of institutional money management, and the CEO of Epoch extolling the virtues of this deal:

“Epoch is pleased to be joining forces with TD, whose financial strength will enhance our competitive advantage as we continue to deepen and expand our capabilities,” said William W. Priest, Chief Executive Officer of Epoch.  “We are confident that this transaction will strengthen Epoch’s existing franchise and further support our client-focused efforts.  Our investment management philosophy aligns with TD’s long-term strategy.  This transaction allows us to combine Epoch’s U.S. and global equities expertise with TD’s client-centric approach.”

Let’s parse Mr. Priest’s comment.  If you take the time to examine Epoch’s financial statement you’ll see that they don’t need TD’s financial strength whatsoever.  They have more than enough cash flow to continue to build their business, and have been growing very rapidly since their founding in 2004.  Since Epoch is a public company the numbers are readily available.  Moreover, there’s nothing about being owned by TD that will “strengthen Epoch’s existing franchise” which consists of managing US and global equities for institutional clients.  If anything, the existing franchise should be worried about a tie up between Epoch and TD.

Teaching the Basic Math to the Staff (2002)

I can’t tell you how Epoch’s investment philosophy and TD’s long-term strategy are in alignment, but the line in Mr. Priest’s quote sounds reassuring.  Mr. Priest gives a hint about what this deal is really about in his last sentence.  When you strip away the jargon about a “client-centric approach,” what Mr. Priest is saying is that TD expects to market Epoch’s investment products to TD’s clients.  In my experience, this statement is easy to make and very to execute.  If TD can’t get its existing client base to commit new money to Epoch, the bank will have grossly overpaid for the deal.  By my quick calculation, the bank is paying 23.5 times trailing earnings and 13.2 time trailing EBITDA.  For this deal to make economic sense, Epoch’s assets under management will need to compound substantially and grow faster than Epoch’s historic rate.

When you strip away the flowery rhetoric, this deal is simply one more example (and there are literally hundred of these transactions) where a bank is attempting to jumpstart its asset management business by acquiring a money manager.  At the same time, Mr. Priest who is 71 along with his management and board are cashing in on their ownership of Epoch.  They stand to earn about $190 million on the deal.  Of course, the management team will also get long-term contracts as part of the transaction, so there are additional rewards ahead.  In the vast majority of cases, these deals are good for the selling shareholders and not so good for the bank’s investors or firm’s clients.  Despite all the rhetoric about compatible philosophies, most of these deals eventually breed acrimony and disappointment.

There’s some chance that this deal will be different because Mr. Priest has sold a money management firm to a bank on a previous occasion.  In 1980, he sold BEA Associates, a pioneer in money management, to Credit Suisse.  He managed to continue to growth the business for nearly 20 years until he was forced to retire about ten years ago.  Obviously, Mr. Priest wasn’t ready for retirement and built Epoch’s assets up to nearly $25 billion.  Of course in 1980, Mr. Priest was only 40 years old, so this time around it will be up to the rest of his management team to make this deal work.

In the next several months, the management team at Epoch will continually assure its clients that “nothing will change.”  On December 6th, when this deal was announced, everything changed.  If the clients stick with Epoch, they’ll find out in the ensuing months and years.

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