UPDATE: Bad Time For Morgan Stanley To Sell Van Kampen, Analysts Say

(Updates with information in third and fourth paragraphs on why Morgan Stanley may want to sell Van Kampen and on the possibility of a joint venture.)

   By Daisy Maxey and Aaron Lucchetti 
 

Buzz on the Street that Morgan Stanley (MS) is looking to shed its Van Kampen mutual-fund business in a sale or joint venture, possibly involving Invesco Ltd. (IVZ), has some analysts questioning Morgan Stanley's sense of timing.

Morgan Stanley's potential interest in selling Van Kampen grows out of the perception that it doesn't have enough assets to compete against fund-company behemoths that manage $500 billion or more. Another factor is the company's increasingly important force of brokers, who often find it easier to sell mutual funds to investors when the funds aren't managed by the brokers' own employer.

Morgan Stanley would be more likely to sell the business completely in coming weeks if it gets a high bid, but recent deals don't suggest that potential buyers are willing to pay big premiums. It could also keep the business, or hold onto a piece of it through a joint venture in which the bank would keep a minority stake in the purchasing asset manager. Such an arrangement would allow Morgan to enjoy any rebound in stock markets that would likely boost the value of a retail asset management firm.

Veteran bank analyst Richard Bove of Rochdale Securities predicts Van Kampen will go in a sale, not in a joint venture.

"If it's a joint venture, it's because they can't sell it," he says.

While the bank may be right to believe it's stronger without Van Kampen, which is shrinking in assets, Bove says, it would be far better for it to try to fix the unit and then sell it at a higher price.

"This company, over the past decade seems, to charge into each area at the top or charge out at the bottom," he says. "Now that they're experiencing serious problems in their asset-management business, they've made the decision to charge out at the bottom, apparently."

Besides Invesco, companies named as possibly pursuing deals for Van Kampen include Aberdeen Asset Management (ADN.LN), Federated Investors Inc. (FII), Franklin Resources Inc. (BEN) and Nuveen Investments Inc., according to analysts.

Wells Fargo Securities analysts have valued the Van Kampen business at about $860 million.

Erica Platt, a spokeswoman for Morgan Stanley, declined to comment on a potential deal. A spokesman for Invesco said it doesn't comment on speculation.

In a note Thursday, Matthew Burnell, senior analyst at Wells Fargo Securities, said that a near-term sale of Van Kampen seems "ill-timed" and "hardly transformational." A sale would reduce Morgan Stanley's annual earnings per share by about $0.04, Wells Fargo Securities estimated.

Van Kampen has suffered net outflows for 10 consecutive quarters. It had about $86 billion in assets at the end of June, down 32% in a year and comprising about 24% of Morgan Stanley's total assets, according to Wells Fargo Securities. Van Kampen's higher concentration in fixed-income funds relative to its peers likely generates slightly lower revenue than the average of its competitors, the note said.

"A near-term sale reduces any of the benefits that Morgan Stanley could enjoy if global markets continue to improve over the next few years. At current valuations for asset managers, and the modest EPS impact from a sale, we see modest reason to complete a sale in the near term," according to Burnell's note.

Michael Wong, an equity analyst at Morningstar Inc., believes a joint venture involving Van Kampen is more logical for Morgan Stanley.

"Because of the synergies with the wealth-management business, which they're growing, I see it as a high likelihood that they would do a joint venture," Wong said.

Sandler O'Neill analyst Michael Kim said in a note dated Aug. 25 that an Invesco/Van Kampen deal makes a lot of sense for Invesco. Adding Van Kampen's U.S.-domiciled mutual-fund assets under management would push Invesco into the top 15 equity and fixed-income managers, at a time when the biggest players enjoy a disproportionate share of industry flows.

"While net flows across Van Kampen's equity and fixed-income mutual funds remain negative (and we could see a step-up in redemptions following a change of control) recent trends are more favorable, with equity outflows slowing and fixed-income net flows turning positive," Kim wrote.

Invesco's current mutual-fund asset mix is skewed toward money-market funds in general and in favor of equities on the long-term side of the business, but fixed-income funds account for nearly two-thirds of Van Kampen's retail assets, according to Kim. Adding retail fixed-income management capabilities would fill a product gap often highlighted by Invesco management and could hasten institutional market share gains, he wrote.

A deal with Morgan Stanley would likely result in enhanced traction with Morgan Stanley/Smith Barney's 18,000-plus financial advisers, Kim wrote.

- By Daisy Maxey and Aaron Lucchetti; Dow Jones Newswires; 212 416 2237; [e-mail]