MFS Investment Management, long rumored to be on the auction block due to lagging profit margins, middling performance and increasing regulatory demands, could be mere days away from a blockbuster merger with another large asset-management firm, according to published reports.
The chatter surrounding the nation’s oldest mutual fund firm ignited over the weekend when reports from The Toronto Globe and Mail and the Boston Business Journal, named as many as five possible suitors, including T. Rowe Price, Franklin Resources, Putnam Investments, Nuveen Investments and Ameriprise. MFS parent, Toronto-based insurer Sun Life Financial, confirmed today that it has hired Morgan Stanley to advise on strategic alternatives.
“Sun Life Financial continually reviews the performance of all of its businesses to deliver and grow shareholder value,” said a Sun Life release on the topic. “The company values MFS as a strategic asset and remains committed to growing the business organically while assessing strategic alternatives. The company has retained investment bankers to advise on strategic alternatives. However, there is no assurance that a transaction will result.” A SunLife spokesman could not be reached for additional comment at press time. John Reilly, an MFS spokesman, said, “Our policy is not to comment on speculation.”
But one industry insider notes that T. Rowe Price would be a great fit for MFS in that it would juice sales among brokers and certified financial planners. “It would totally salvage their reputation in the broker/dealer channel as a direct marketer in competition with the b/d channel, an image that still lingers today,” says Louis Harvey, president and CEO of Boston-based research firm Dalbar. MFS, the 25th largest mutual fund shop in the U.S., with $168 billion in assets, would be catapulted into the top 10 in a merger with T. Rowe Price.
T. Rowe would also help shore up MFS’ fixed-income and international fund groups. “At the end of the day, more brokers would sell T. Rowe Price funds,” says Harvey. A T. Rowe spokesman did not return phone calls seeking comment.
Ameriprise, which has been trying to separate its distribution force from its investment and insurance companies, also stands to gain enormous credibility. “The fear of the conflict of interest that’s inherent in advising on your own product is pretty evident,” Harvey says. “As the regulatory environment tightens, it seems like it’s only a matter of time before it’s going to be seriously curtailed.” The plan, Harvey says, would likely be to merge the RiverSource Funds into the MFS lineup to create brand recognition and free its 12,000 financial advisors from conflicts tied to selling house funds.
Ameriprise spokesman Paul Johnson declined to comment on the alleged negotiations with Sun Life, but he said the company intends to pursue any acquisition opportunities that make sense.
MFS has built a strong brand that dates back to 1924 when it founded Massachusetts Investors Trust, which is credited as being the first mutual fund ever invented. Sun Life paid $45 million for MFS in 1982, which managed 13 mutual funds. Analysts now estimate that the fund complex is worth at least $4 billion. But its connection with the mutual fund trading scandal and subpar profit margins have been a headache for Sun Life, analysts say. Its pretax operating margins in the second quarter were 27 percent, up from 26 percent the prior quarter but still below the industry average.
Still, Sun Life says it is making strides in returning the fund shop to its former glory. “MFS is gaining flows on the institutional side both domestically and internationally and has delivered significant margin improvement over the past year,” the company said in the statement. It is also “working hard” to grow MFS, including expanding distribution and research globally, and improving performance and profit margins, Sun Life said.
A sale of MFS would be consistent with recent trends in the asset-management business. Banks and insurance companies have been exiting the asset-management business to shed legal risk and focus on their core competencies. Meanwhile, pure play asset managers are increasingly looking to improve scale amid rising costs and stiff competition for wallet share.
In June 2005, Citigroup swapped its poor performing asset-management arm for Legg Mason’s brokerage arm. In February, Merrill Lynch sold its asset-management unit, Merrill Lynch Investment Managers (MLIM) to BlackRock in exchange for a 49.8 percent stake in BlackRock—a move aimed at eliminating conflicts of interest and filling product gaps.