Ameriprise Financial Inc's purchase of an asset management business from Bank of America Corp contains a key feature -- access to the bank's massive distribution system.
It means that Ameriprise can now sell its investment products and annuities through arguably the largest network of brokers, private bankers and bank offices in the United States.
That includes more than 15,000 Merrill Lynch brokers, the largest U.S. retail bank, and U.S. Trust, the bank's private wealth management unit.
That's gigantic, said John Nadel, analyst at Sterne, Agee & Leach. It's going to be overlooked by a lot of folks, but the distribution network is very important.
The deal for about $1 billion to buy long-term funds with $165 billion under management from Bank of America's Columbia Management unit could turn Ameriprise from a secondary player into one within striking distance of the big league.
It really transforms the asset management business, said Chief Executive Officer Jim Cracchiolo in an interview.
Ameriprise has avoided the losses that sent many of its rivals off to seek government bailouts, partly because of a conservative strategy to carefully manage capital to protect its insurance arm. But it has also largely slipped under investors' radar.
When the deal closes in the spring, Ameriprise will have about $400 billion in assets under management making it the eighth-largest U.S. asset management business by mutual fund assets under management, the company said.
Ameriprise's revenues are split between its insurance businesses and its distribution and asset management.
In 2008, asset and wealth management units contributed $4.4 billion in net revenues, while $3.6 billion came from annuities and protection. The acquisition will make asset management a bigger slice of that pie: Ameriprise said Columbia has current run-rate revenues of over $800 million.
Investors gave the deal a big thumbs up on Wednesday as Ameriprise shares climbed as much as 14 percent to $37.36. Through Tuesday, the shares are up 38 percent this year.
Several analysts said Ameriprise was getting a good deal for the Columbia funds, at least on paper.
The price represented seven times the Columbia unit's expected earnings before interest, taxes and depreciation, Ameriprise said. That compares with an industry average of around 11 times EBITDA, according to studies of recent deals by Jefferies Putnam Lovell.
But the price also reflected the hobbled quality of the Columbia business, said Darlene DeRemer, partner in New York investment bank Grail Partners.
It's a distressed property, said DeRemer, with lower operating margins than the industry average and redemptions as fund customers worried about Columbia's future after it spent months on the market.
Columbia paid among the largest penalties of any firm following the market-timing scandals that rocked the industry earlier this decade. But new leaders merged away underperforming funds and hired new managers for others.
Columbia's improved performance since then will give Ameriprise a solid, if unexciting platform to build out its asset-management business, said Morningstar analyst David Kathman.
As for the Columbia brand, advisors and investors have not had a clear sense of what the brand is or why they should buy it, said Kathman. But they have some good funds.
On an asset-weighed basis, the Columbia funds have returned 19.3 percent for the year so far, 0.3 of a percentage point worse than peers, according to Morningstar. But the family beat its peers in 2008 and 2007, evidence of the makeover Bank of America put in place.
The funds being sold represent about a quarter of Columbia's total assets of $700 billion, with the remainder in low-margin money market funds that are staying with Bank of America for now.
They're not particularly aggressive, which is why they're not doing as well as others this year, Kathman said.
NEW TEAM, BUT LAYOFFS LOOM
The funds' strategy could make them a good fit for conservatively-managed Ameriprise. The combined operation will be based in Boston and operate under the Columbia brand.
Ameriprise's chief investment officer Ted Truscott will stay in place, and will be joined by many of Columbia's best-known executives including Colin Moore, Columbia's chief investment officer.
Ameriprise mentioned unspecified synergies as it combines the two organizations which may indicate significant layoffs to come. The company has not yet finalized the location or number of job cuts, a spokesman said.
Spun off from American Express in 2005, Ameriprise has slowly notched up the scale of its investment businesses, adding H&R Block Inc's retail brokerage, and asset manager J & W Seligman & Co last year.
The deal is very much consistent with Ameriprise's whole management strategy, said Nadel at Sterne, Agee & Leach.
(Reporting by Ross Kerber and Elinor Comlay; Editing by Tim Dobbyn)