SEI Investments Insight
Periodic Commentary on Markets and SEI Investments’ Products
September 15, 2000
The Financial Merger Frenzy
The recent acquisition trend in the finance sector is continuing to run rampant, as several major mergers have been announced in
recent weeks. This takeover wave is expected to continue into the near-term, as the need to expand finance operations is strong and the
number of available takeover targets within the industry are waning rapidly. SEI’s equity and fixed income portfolios have been well
positioned in regards to the financial sector and its recent merger trend, which has provided a significant boost to performance.
Size and scale are the catalysts for the recent merger activity among financial companies. Driven by the escalating globalization of
corporations and investment markets, financial company clients are demanding greater access to capital and a universal range of
product offerings on a global scale. However, most financial firms have traditionally specialized in a single segment of the industry
such as banking or securities, and have been focused primarily in a specific region, such as the US, Europe or Asia. As a result, the
major financial firms are scrambling to expand operations and meet these broadening client demands in order to secure market share
and keep from losing clients to larger, more capable competitors. Generally, the most timely and efficient method for these financial
companies to enter new segments and expand lending power is through acquisition.
The growing merger wave in the financial sector is forcing decisions from those companies that remain without partners. Several
major deals have been announced in recent weeks, as firms work to position themselves to provide greater size and scale to satisfy
client demand (see Table 1). However, this rise in mergers has narrowed the field of remaining merger candidates significantly and
has placed at risk, many of the major firms yet to consummate a deal which in turn is fueling further rumors of additional mergers and
acquisitions.
Table 1: Recent Merger Announcements in the Finance Sector
Acquirer
UBS AG (Switz.)
Credit Suisse First Boston (Switz.)
Citigroup
Chase Manattan Corp.
Target
PaineWebber
Donaldson Lufkin & Jenrette
Associates First Capital
JP Morgan & Co.
Deal Size
$10 billion
$12 billion
$31 billion
$36 billion
Combined Size
$272 billion
$98 billion
The recent merger activity and ongoing takeover speculation has sent the prices of target financial stocks soaring (see Table 2).
Several companies have been identified as primary takeover candidates including Lehman Brothers and Bear Stearns. These firms are
investment banking and securities companies with desirable assets but are becoming too small in the opinion of many analysts to
effectively compete as independents in the developing market environment. Even the larger securities firms like Goldman Sachs and
Merrill Lynch have been mentioned as acquisition targets, since their scale and capital availability is deemed insufficient by some
analysts to effectively compete over the long-term horizon.
Table 2: Financial Takeover Targets have Skyrocketed in Recent Months
Company
JP Morgan
Associates First
DLJ
PaineWebber
ACQUIRED
Market
Cap
$36 billion
$31 billion
$12 billion
$10 billion
Performance
(since 5/31/00)
+ 39.0%
+ 43.3%
+ 125.7%
+ 57.3%
LEADING TARGETS
Market
Performance
Cap
(since 5/31/00)
Company
Goldman Sachs
$62 billion
+ 75.4%
Merrill Lynch
$57 billion
+ 45.4%
Lehman Brothers
$17 billion
+ 95.1%
Bear Stearns
$7 billion
+ 66.7%
Source: Wall Street Journal, MSNBC
SEI’s equity and fixed income portfolios have been positioned to capitalize on the recent trends in the finance sector. SEI’s Large Cap
Growth Fund and Large Cap Value Fund managers recognized strong relative price valuations among financial stocks earlier this year
and established an overweighting to the sector as a result. Our Large Cap Growth Fund managers developed an overweighting earlier
in the year to brokerage stocks, as they believed that this type of offering presented tremendous price appreciation potential relative to
the richly valued technology sector. Our Large Cap Value Fund managers, on the other hand, constructed an overweighting to banking
firms during the same time period, as these managers recognized tremendous value in some of these stocks given their multiples
earlier in the year. Beyond equities, SEI’s Core Fixed Income Fund also maintains an overweighting to the finance sector, which has
proven beneficial up to this point in time.* Spreads have been tightening for high-grade brokerage and banking paper driven by the
recent merger trend. Demand for these issues is expected to increase further given the likelihood of additional merger activity.
* This material represents an assessment of the SEI Funds and the market environment at specific point in time and is not intended to be a forecast of
future events, or a guarantee of results.
File No: 214
— For Financial Intermediary Use Only. Not for Public Distribution. —
9/18/00