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Smart
Investing : Why mergers make sense
Big fund houses are looking for deals to get bigger and tough times
are forcing smaller players to sell out. All in all the time is ripe
for M&As
The
Smart Investor Team
During the last
couple of years, the Indian mutual fund industry has been witness
to a spate of mergers and acquisitions. The most recent of these being
Principal Mutual Fund's agreement to buy out Sun F&C Mutual Fund's
schemes.
There have been other cases too. Sun F&C Mutual itself had acquired
the schemes of Jardine Fleming Mutual Fund in June 2002, while Templeton
Mutual Fund bought out Pioneer ITI Mutual Fund. Zurich India was acquired
by HDFC Mutual Fund during the same year.
Sundaram Finance took over Newton Investment Management's 39 per cent
stake in the joint venture Sundaram-Newton, while one of India's best-performing
fund houses, Alliance, also flirted with the idea of selling out before
deciding otherwise. So what is really driving this consolidation spree?
According to industry watchers, what makes consolidation inevitable
is the fact that small players would struggle to cope in an increasingly
competitive and narrow market.
The thin margins and low investor base will make it difficult for
the smaller players to survive.
Considering the fact that a majority of the Indian fund houses are
relatively small, the size of the asset base becomes a critical issue.
An asset management company can hope to make money only if it reaches
critical mass in terms of assets.
"Without size, it's impossible to generate a reasonable return
on investment as there are fixed costs that have to be met,"
says U R Bhat, head of broking, JP Morgan. Obviously, smaller players
cannot grow dramatically with marginal returns necessitating consolidation.
Acquisitions, therefore, provide the easier way to boost the asset
base.
For example, HDFC Mutual Fund's purchase of Zurich made it the second-largest
private sector fund in India after Prudential ICICI.
Moreover, domestic firms are under competitive pressure with more
international players entering the fray. "For smaller players,
it make more sense to merge with a big player and have a significant
presence rather than remain small and marginal," says Bhat.
An additional lure for the buyers is a fund's equity assets portfolio.
Considering the fact most Indian mutual funds are debt skewed and
also because equity assets earn more income for the asset management
firms, the acquirer looks for funds with a higher equity base.
Pioneer and Zurich had a big percentage of equity assets when they
were taken over. Besides, most big mutual fund houses still have very
small retail portfolio. A fund with a lower asset base stands to benefit
by taking over a fun with a large retail base, which, by default,
expands the investor base.
Apart from the Unit Trust of India, none of the other mutual funds
have any significant mass investor base and most of the funds depend
on institutional business and high networth individuals to expand
the corpus. So that's a key driver too. Many of the deals by public
sector funds in the past were mainly for the acquisition of retail
assets.
But why are foreign players such as Pioneer and Zurich with moolah
to spare moving out, while it will suit them to acquire smaller players
and expand their business in India, especially given their excellent
track record?
According to a fund manager, the Indian mutual fund industry is too
small for some of the foreign funds to devote time and resources.
Pioneer's exit was mainly because it did not form part of its strategic
intent. In the case of Zurich, its domestic mutual fund businesses
were not making sense since its has been facing difficult financial
conditions elsewhere in the world.
Industry watchers say consolidation will continue as marginal players
will be compelled to exit if they do not have an USP. However, the
going may not be very easy. "Benchmark deals have been priced
aggressively and hence, other small players also expect the same kind
of valuations for themselves," adds Bhat.
For the investors, it just means that they will be left with fewer
choices. Hopefully, there would be a handful.
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