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

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.

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.

Morgan Stanley and Invesco have remained silent as the rumors circulate. Wells Fargo Securities analysts have valued the Van Kampen business at about $860 million.

Erica Platt, a spokeswoman for Morgan Stanley, declined to comment. 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; Dow Jones Newswires; 212 416 2237; [e-mail]