Merger mania may be coming to a collateralized debt obligation manager near you. Several CDO professionals said Triarc Companies' planned acquisition of Deerfield Capital Management, a CDO manager with a reputable track record, could spark mergers among other experienced managers and outsiders looking to get a piece of the CDO business. And the growing consensus that managers matter when it comes to CDOs is fueling the speculation now.
"I think it could be the tip of the iceberg," said Larry Penn, managing director at Ellington Management Group in Old Greenwich, Conn., which has closed six CDOs in its Duke Funding program. "There could be a lot of combinations that make sense," he said, referring to outside investors that could bring synergies, in addition to cash, to CDO managers. He said Ellington, which one outsider tipped as a suitable candidate given its independent management structure and solid track record, has not been approached by any buyers but in theory would consider such an offer.
Although CDO professionals said they are not aware of any specific deals in the works, they predicted the ice-breaker will at least prompt some potential buyers to run the numbers. "To get into this business it may be more efficient to do a transaction with an established manager rather than trying to get established yourselves," said Eric Goodison, partner at Paul, Weiss, Rifkind, Wharton & Garrison in New York, referring to the premium that well-known managers can demand. He added the market is "very focused on managers with good reputations and experience."
Typical CDO management fees of 40 basis points, compared to roughly 17bps for traditional asset management, also make the CDO business an attractive one for outsiders to get in to.
Among potential targets, ZAIS Group might make a suitable candidate given it has built a niche for itself in the CDO squared market, mused two outsiders. But Christian Zugel, president, dismissed any speculation. "We are very comfortable to be independent and fail to see the benefit of such M&A activities," he said in an e-mail.
A merger would probably only make sense for independent shops with CDO backgrounds and not for larger asset management firms with CDO franchises such as TCW Asset Management and Putnam Investments, according to professionals. "That's their business plan. Not to start a firm and run it for the rest of their lives. Most of them want to get CDOs up and running, have good performance and then get bought out," said one CDO analyst, referring to some independent managers.
