Musical chairs in the world of finance

[notiCIas]

Musical chairs in the world of finance

Online brokers, credit card firms and asset managers are all targets in a new round of merger mania.

July 13, 2005: 12:54 PM EDT
By Paul R. La Monica, CNN/Money senior writer


NEW YORK (CNN/Money) – The urge to merge is alive and well in the specialty financial services area.

If you use a credit card to make an online stock trade or invest in mutual funds, chances are that at least one of the companies involved in those transactions could be in play.

Ameritrade (Research) is buying the U.S. assets of TD Waterhouse from Toronto-Dominion Bank (Research). Bank of America (Research) is purchasing credit card giant MBNA (Research). And that deal follows Washington Mutual's (Research) acquisition of Providian Financial (Research).

Investors not trading like it's 1999
And industry observers think this could be just the beginning.

"There will be more consolidation in financial services," said Neil Hennessy, president of mutual fund firm Hennessy Funds.

There is intense competition in the brokerage industry in particular, which could drive consolidation. Online trading fees have come down in recent years in order to attract retail investors, many of whom are still smarting from the losses they incurred during the burst of the tech bubble and resulting bear market of 2000-2002.

So there may now be too many online brokers going after a finite number of customers.

"Overcapacity is driving consolidation among brokers. It's partly that there is more competition and that the market is not performing as well as it did in the late 1990s," said Fred Lipman, a partner in the mergers and acquisition practice with Blank Rome, a Philadelphia-based law firm, and author of the book "Valuing Your Business."

In fact, Charles Schwab (Research) has been the subject of several takeover rumors lately and the company shot down speculation last week that it was for sale. Britain's HSBC (Research) was said to be looking to buy it. The fate of Schwab's smaller rival E*Trade Financial (Research) is up in the air as well since E*Trade's attempt to buy Ameritrade did not succeed.

Richard Repetto, an analyst with Sandler O'Neill & Partners, said that E*Trade could be a good fit for an investment bank, retail bank or even Schwab. "I believe Schwab that they are not for sale," said Repetto "They have a plan in place and a potential acquisition would benefit them."

One word: Plastic
Looking at the credit card business, the mergers in that area have raised questions about whether Capital One (Research), or even American Express (Research), which plans to spin-off its financial advisory unit later this year, could be takeover targets as well.

Craig Maurer, an analyst with Fulcrum Global Partners, said that Capital One is more likely to be looked at by other financial services firms in the wake of the Providian and MBNA purchases.

"Capital One is gong to be highly coveted since they represent the last major card company of significant scale," said Maurer.

As such, shares of Capital One have gained nearly 12 percent the Bank of America-MBNA deal was announced late last month. Shares of Dow component American Express have been flat during the same period, however.

But Maurer said a deal for Capital One is far from certain since he thinks management is not interested in selling unless a buyer is willing to offer a significant premium to its current market value.

Shares of Capital One currently trade at about $83. But Maurer said it would take a minimum bid of $105 a share to convince management to entertain offers and that a more likely asking price it would be looking for is $120 a share.

Liquid asset managers?
Regardless of what happens with brokerages and credit cards, Hennessy said investors should keep an eye on another area of financial services that's not getting as much attention: asset managers

Citigroup (Research) is selling its asset management unit to Legg Mason (Research) in exchange for Legg Mason's broker-dealer business.

And Amvescap (Research), a British-based firm that owns the AIM and Invesco family of mutual funds, announced last week that CI Fund Management, a Canadian asset manager, has expressed interest in buying the company.

Shares of Amvescap have surged more than 20 percent in the past week on the merger speculation. Hennessy said that other mutual fund firms, such as Franklin Resources (Research), T. Rowe Price (Research), Janus Capital Group (Research) and Affiliated Managers Group (Research) could also be attractive targets.

So it seems safe to say that the consolidation craze in financial services is not close to ebbing any time soon as competition throughout the industry intensifies.

"These mergers come in waves," said Lipman. "It's more cost-efficient to be a part of a bigger organization and spread overhead over a larger group of people."