Although the asset management industry was turned completely on its head following the collapse of the credit and equity markets last year, there has been very little consolidation to speak of this year. The biggest deal of 2009, BlackRock's (BLK) $13.5 billion acquisition of Barclay's Global Investors (BGI), a unit of Barclays PLC (BCS), has certainly sent shockwaves through the industry, but much of the deal making (including BlackRock-BGI) has been focused on divestitures from financial institutions looking to streamline their operations or improve their capital structure. With assets like Bank of America's (BAC) Columbia Management Advisors (CMA) and Morgan Stanley's (MS) Van Kampen fund business still being shopped around, we expect this trend to continue through the end of the year.

What we're less likely to see, however, is rampant consolidation among the remaining publicly traded asset managers, many of whom are still struggling to get back on their feet in the aftermath of the bear market. Much as we believed that a large number of deals would not occur earlier in the year (when most asset managers were struggling to figure out what was happening in their own house, let alone what was going on in someone else's), we think the recent rally in the markets, which has improved the operating results and stock prices of just about every publicly traded asset manager, could be a stumbling block for consolidation.

That's not to say that there isn't interest in mergers and acquisitions, as top managers from Franklin Resources (BEN) to Legg Mason (LM) have noted a desire to add to their product lineups in the wake of the bear market. But there seems to be a disconnect right now between what sellers believe their businesses are worth and what buyers are willing to pay for them--much as what was rumored to have occurred this summer with Janus Capital Group (JNS) and its bidders. We believe that over time this will likely work its way out, but with several major banks and other financial institutions looking to sell their asset management businesses, it may be difficult for pure-play asset managers to get a premium valuation in the near term.

What Has Driven Consolidation in the Past?
Looking back at past periods of consolidation, with 2005-06 being the most recent, the primary motive behind most of the merger and acquisition activity in the industry has been to increase the scale and scope of the acquiring firm. Legg Mason's 2005 purchase of Citigroup's (C) asset management operations not only doubled its assets under management (AUM), but also focused it squarely on its asset management business (having exchanged its private client and capital markets businesses for Citigroup's asset management unit).

Meanwhile, BlackRock's 2006 purchase of Merrill Lynch Investment Managers (MLIM) not only increased the firm's AUM and revenue by more than twofold, but greatly expanded BlackRock's exposure to equity strategies, splitting its managed assets more evenly across asset classes. And Invesco's (IVZ) 2006 purchase of both PowerShares, a provider of exchange-traded funds, and W.L. Ross, a manager of distressed assets, not only increased its AUM, but also expanded its lineup of alternative investments.

While there have been plenty of offbeat mergers and acquisitions since the last big round of consolidation (like Madison Dearborn Partners' purchase of Nuveen Investments at the height of the private equity binge in 2007), most of the deals have been smaller in nature and firmly focused on expanding the scale and/or scope of the acquiring firm's operations. Eaton Vance's (EV) 2008 purchase of M.D. Sass' Tax-Advantaged Bond Strategies business is a perfect example. While the acquisition added less than $7 billion in AUM (versus more than $120 billion for the firm as a whole prior to the deal), it provided Eaton Vance with another niche product that could easily be plugged into its already strong lineup of tax-advantaged equity and fixed-income investments.

BlackRock's Purchase of BGI Could Spur Consolidation

Much as BlackRock's purchase of MLIM transformed it from a bond fund powerhouse into a more broadly diversified and dominant player in the asset-management industry, the company's June 2009 purchase of BGI takes it to an entirely new level.