IG in the mood for further expansion, analysts believe

(November 5, 2003) Jeff Orr is coy about future acquisitions but some industry experts think the president and CEO of Investors Group may be working — or about to work — on bringing a new company under its umbrella to make it the biggest mutual fund company in Canada by an even larger margin.

For now, the head of the Winnipeg-based firm says the company’s focus is on executing its basic business plan and finalizing a systems conversion project, the last major integration challenge from its nearly three-year-old deal for Mackenzie Financial.

“I wouldn’t want to comment on anything specifically that may be going on,” Orr says. “I think we still have work to do with respect to opportunities with Mackenzie and Investors Group even though we’ve achieved our [$100-million] synergy targets. We have always been in a mode that if something made sense, both strategically and financially, we would look at it.”

One Toronto-based analyst, who requested anonymity, says with the Mackenzie integration virtually complete, there’s nothing stopping Investors Group from dipping into the acquisition waters again. He says Power Financial, the majority owner of IG, is “obsessed” with maintaining the status of it and its sister firm, Great-West Lifeco, as the number-one players in the their respective sectors.

“The manufacturing of products will become a commodity [in the near future] and the only way to have an advantage is through scale. Then you need wide-scale distribution. If you think about the acquisitions they’ve both made, they fit both objectives. The Power guys are obsessed with that,” he says. “For that reason, you can expect Investors Group and Great-West to make more acquisitions in the future.”

Of course, the Investors Group and Mackenzie partnership, with a total of nearly $70 billion in assets under management as of September 30 ($38.4 billion with Investors Group plus Mackenzie’s $31.5 billion) is still far and away the largest mutual fund company in Canada. RBC Asset Management is number two with $38.5 billion in assets after recently reclassifying $3 billion in private-pool assets.

One CEO of a Toronto-based mutual fund company says Investors Group and its Power Financial parent are significant players in all areas of financial services except for banking, a hole they tried to fill with the Amicus subsidiary of CIBC a few years ago. It’s also one in which they once had a presence, through Montreal Trust, which it sold to Scotiabank in the mid-nineties.

He says one obvious challenge is the lack of mid-tier banks for sale. “There’s just National Bank and Laurentian, both concentrated in Quebec. Laurentian has the problem of insufficient scale and an onerous union agreement which makes profitability a challenge,” he says.

But there may also be an opportunity among the big five banks, provided the current shackles are removed and they’re allowed to merge, as is widely expected. “It is intriguing to speculate that if we do get into a consolidation dynamic with mergers of the big banks, that there will be one left as the odd man out. Perhaps they’ll be a candidate for a deal with Investors Group,” he says.

Dan Hallett, president of Dan Hallett & Associates, a Windsor,Ont.-based investment research firm, believes another merger may be in Investors Group’s future but he says the number of possible targets has been shrinking steadily.

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He says there are a few companies that are publicly up for sale — Investment Planning Counsel of Canada and Cartier Partners Financial Group are two that come to mind.

“In an environment like this, an acquisition makes the most sense if there are opportunities for economies of scale, usually in the form of cost cutting. I’m not sure I see that for those particular firms. Then again, a lot of times mergers happen just for objectives related to simply growing rather than being a really smart, strategic move,” he says.

Clarington Funds is another name that comes up in discussion and is one of the few mid-sized firms to have performed well lately, Hallett says. Others like Guardian Group of Funds and Synergy Mutual Funds have been bought by BMO and CI Fund Management, respectively. The presence of Michael Lee-Chin, CEO of AIC takes it out of the running and John Driscoll, the president, CEO and majority owner of Sentry Select Capital is apparently looking to increase his ownership stake, making it an unlikely target as well, Hallett says.

Geoff Kirbyson is a writer based in Winnipeg.

(11/05/03)