Jefferies Putnam Lovell Expects Resourceful Deal-Making to Drive Asset Manager, Financial Technology M&A in 2009

As the US-led crisis of credit and confidence reshapes the global financial landscape, investment sector M&A activity in 2009 will be powered primarily by those in need of capital and those possessing capital resources rather than strategic deal-making, according to Jefferies Putnam Lovell, the investment banking group of Jefferies & Company, Inc. focused on the asset management and financial technology industries.

Following robust activity in the first six months of 2008, transactions in the latter half of the year dwindled to a near-halt as the credit crunch intensified, according to Are We There Yet?!, a Jefferies Putnam Lovell review of 2008 M&A in the global asset management and financial technology industries. With the timing of worldwide economic recovery uncertain, historically active buyers will turn into sellers as less-familiar players step into the limelight, according to Jefferies Putnam Lovell.

"Pure-play asset managers, acting alone and in concert with private equity firms, will increasingly take advantage of this unique situation as commercial banks and insurance companies shed non-core investment businesses to raise capital," said Aaron Dorr, a New York-based Managing Director at Jefferies Putnam Lovell. "In asset servicing, we see a wave of consolidation looming, as undercapitalized companies look to divest operations, while small- and mid-sized independents seek shelter within better-capitalized partners."

Among the trends Jefferies Putnam Lovell expects to unfold in 2009 are:

• Transaction structure will take on a significantly greater role in deal completion, with few buyers willing or able to close cash deals. Asset swaps, joint ventures and complex earnout provisions will become more commonplace. Stock will be used more frequently as acquisition currency.
• The changing landscape will provide greater opportunity for buyers with conviction, a longer-term outlook, and ability to raise capital. Large, pure-play asset managers will continue to be natural acquirers given cultural compatibility and the desire to build product capability, client diversity and market share. Better-capitalized international institutions will be increasingly active and cross-border deals will represent a disproportionate share of deal flow as non-US buyers seek to globalize via acquisition at historically low pricing levels.
• Asset manager deal pricing will remain depressed as cautious buyers transact with desperate sellers and pursue only the most strategically compelling opportunities. Price dispersion will continue to increase as larger diversified asset managers with true third-party businesses garner significantly greater buyer interest than sub-scale firms without robust investment capabilities and distribution.
• Armed with ample capital and the need to deploy it, private equity firms will be active buyers of asset managers, in some cases partnering with strategic buyers. The pace of their acquisitions will accelerate as the availability of leverage returns.
• Traditional long-only asset classes will gain inflows at the expense of alternatives, from the "denominator effect” and a back-to-basics approach among skittish private client investors. Alternatives will continue to play an important role, particularly among institutional investors, and the long-term growth trajectory of alternatives managers remains strong. However, the alternatives sector will be reshaped in 2009 as investors reconsider fee levels, demand more flexible capital lock-up periods, and insist on greater transparency. Increased regulatory oversight will raise the cost of doing business.
• Alternatives transactions will be driven primarily by sellers that otherwise run the risk of folding, unable to generate a profit on (shrinking) management fees alone. Survivors – with demonstrated infrastructure and risk management – will be well-positioned as sophisticated institutional investors resume inflows. Funds of hedge funds will remain relevant, and strategic buyers will seek to acquire such firms once the broader markets and asset levels stabilize.
• The IPO window will remain closed in 2009 for asset managers. Those that still find going public appealing will wait for the multiples of listed asset managers to normalize before even considering a flotation.
• Globalization, economies of scale and responses to regulatory reforms will be key drivers of financial technology deal activity. Despite the downturn in IT spending, M&A in asset servicing, risk management and exchanges will be robust. Financial technology firms with strong cash flow and unblemished balance sheets will come out of the crisis stronger as they take over weaker players, and pick off the non-core assets that banks and insurance companies will look to divest.

About Jefferies Putnam Lovell

Putnam Lovell, the division of Jefferies & Company, Inc. focused on the financial services industry, offers a wide range of corporate advisory services, including mergers and acquisitions advice and capital raising. Putnam Lovell’s global client base is comprised of diversified financial services firms, institutional and mutual fund managers, alternative investment managers, banks, broker-dealers, insurers, and financial technology firms. Putnam Lovell was founded in 1987 and operates from offices in New York, San Francisco, Boston, and London. Since July 2007, Putnam Lovell has been a division of Jefferies & Company, Inc., the principal operating subsidiary of Jefferies Group, Inc. (NYSE: JEF). For more information please visit www.jefferies.com/jpl

About Jefferies

Jefferies, an independent, full-service global securities and investment banking firm, has served companies and their investors for more than 45 years. Headquartered in New York City, with offices in more than 25 cities around the world, Jefferies provides clients with capital markets and financial advisory services, institutional brokerage, securities research and asset management. The firm provides investors with fundamental research and trade execution in equity, equity-linked, and fixed income securities, including corporate bonds, high yield bonds, US government and agency securities, repo finance, mortgage- and asset-backed securities, municipal bonds, whole loans and emerging markets debt, as well as commodities and derivatives. Jefferies offers companies capital markets, merger and acquisition, restructuring and other financial advisory services. Jefferies & Company, Inc. is the principal operating subsidiary of Jefferies Group, Inc. (NYSE: JEF: www.jefferies.com).