On Wednesday, Ameriprise Financial Inc. (NYSE: AMP) announced that it agreed to buy Bank of America's (BAC) Columbia Management mutual fund business for approximately $1 billion in cash. Markets viewed the deal a positive for AMP pushing its share price by $3.99, or 12.3% to close at $36.33 on Wednesday, its highest price in nearly a year.
Earlier in June 2009, Ameriprise acquired the global investment distribution business of Standard Chartered PLC. So far, since its spinoff from American Express in 2005, AMP has acquired three businesses and raised stake in one.
Ameriprise is in a position to shop around as its capital position is in excess of $2 billion, whereas Bank of America has been facing capital crunch since its Merrill Lynch acquisition. Having been told by regulators to raise $33.9 billion to bolster capital position, Bank of America had to sell Columbia Management mutual fund business without waiting for a hefty premium.
The deal catapults AMP to eighth position in the US mutual fund industry and 20th position in the global asset management industry. Ameriprise will become a much bigger player in the second tier of asset management companies, with assets between $100 billion and $700 billion. Top-tier asset management firms have assets of $700 billion to over $1 trillion. Financially, the deal doubles the size of Ameriprise's asset management business, and as a result is expected to raise its profit contribution to about 20% to 25% of net earnings, compared with the current 10% to 12%.
The deal price is cheap as Ameriprise is paying less than 1% of $165 billion in Columbia's assets under management. Moreover, Columbia's assets are well diversified with $93 billion in equity and $72 billion in fixed income. Had Ameriprise bought Columbia's cash business, it would have been more comprehensive for the former. The deal includes a five-year strategic distribution agreement that provides Ameriprise ongoing access to clients of Bank of America affiliated distributors, including U.S. Trust. Columbia adds extensive talent and a broad lineup of strong-performing retail and institutional investment products to Ameriprise Financial. Moreover, Ameriprise can leverage the strength of the well-regarded Columbia Management and Columbia Wanger brands.
Ameriprise is expected to generate $130 to $150 million in annual net synergies, with approximately half of these savings expected to be realized in the first year and substantially all in the second year. Jim Cracchiolo, chairman and chief executive officer of Ameriprise said that the acquisition could deliver attractive returns in excess of cost of capital to Ameriprise investors. Moreover, following the acquisition, Ameriprise balance sheet is expected to remain strong without any liquidity concerns.
The combined asset manager, which will be based primarily in Boston, will operate under the Columbia Management brand. Columbia Wanger and the Acorn family of funds will retain their brands. The RiverSource brand will remain the primary mark for the company's insurance and annuities entities and certain institutional and mutual funds. Marsico Capital Management will continue to serve as a sub-advisor for certain Columbia Management funds. The combined U.S. asset management business will be led by Ted Truscott, currently president, U.S. asset management, annuities and chief investment officer, Ameriprise Financial. Michael A. Jones, currently president of Columbia Management, will serve as president, U.S. asset management. Colin Moore, chief investment officer at Columbia Management, will serve that role for the combined organization.
I view the deal positive for Ameriprise as the payback period is relatively low and it doesn't change the company's debt-to-total capital ratio dramatically. Moreover, this is the right time for Ameriprise to build assets as prices are relatively cheap. Sooner or later, prices could go up as competitors are vying for similar assets.
