01—Abstract
Summary
Summary of the 10-K filed March 31, 1999. Cited figures are marked; the original filing is the authoritative source.
Affiliated Managers Group (AMG) operates a holding-company model: it buys majority stakes in mid-sized investment management firms and receives an Owners' Allocation (typically 30-50%a of affiliate revenues) after affiliates fund operating expenses from a fixed Operating Allocation (typically 50-70%).
At December 31, 1998 it held 13 affiliates managing $62.1 billionb in pro forma assets, and reported 1998 revenues of $238.5 million (up from $95.3 million in 1997), operating income of $92.8 million, and net income of $25.6 million, or $1.33 per diluted share, versus a net loss of $8.4 million in 1997. Growth has been driven almost entirely by acquisitions, which are financed with bank debt and equity. Year-end 1998 total debt was $190.5 million on the credit facility, plus $22.0 million in notes payable to related parties.
The balance sheet is dominated by intangibles: of $605.3 millionc in total assets, $490.5 million are acquired client relationships and goodwill, so the company's earnings quality depends on the continued value of those assets. EBITDA was $76.3 million and EBITDA as adjusted was $45.7 million, both management-defined measures that exclude non-cash amortization. Pro forma for the Rorer, Essex and DHJA acquisitions, Tweedy, Browne alone accounted for about 28% of revenues and roughly 42% of pro forma EBITDA Contribution (39.3 of 96.9 million).
Concentration in that one affiliate, along with dependence on key individuals, is a central risk. After the March 3, 1999 public offering, which raised $102.3 milliond in net proceeds used to repay debt, outstanding debt fell to $156.2 million with $173.8 million available under the credit facility. The company plans further acquisitions, including The Managers Funds, L.P., and expects to keep borrowing or issuing equity to fund them.
It has never paid a cash dividend and its credit facility prohibits dividends. Management also faces substantial put and purchase obligations to affiliate owners, which range from $11.0 million to $227.5 million, so future share issuance or borrowing for these purchases could dilute shareholders or raise interest expense.
02—Key points
Key Highlights
- Revenue grew about 150% to $238.5 million in 1998, mainly from the New Affiliates (Gofen and Glossberg, GeoCapital, Tweedy, Browne and Essex) added through acquisitions.
- Net income swung to $25.6 million ($1.33 diluted EPS) from an $8.4 million net loss in 1997, which included a $10.0 million extraordinary debt write-off.
- Assets under management reached $57.7 billion on a historical basis ($62.1 billion pro forma for all 13 affiliates), up 26% year over year.
- Intangible assets of $490.5 million make up about 81% of total assets of $605.3 million, which creates amortization drag and impairment risk.
- Tweedy, Browne, the largest affiliate, represented about 28% of pro forma 1998 revenues, a significant concentration risk.
- The March 1999 public offering raised $102.3 million in net proceeds, cutting debt to $156.2 million with $173.8 million available under the credit facility.
- AMG pays no dividends and its credit facility prohibits them; capital is reinvested in new affiliate acquisitions, with the pending Managers Funds purchase among them.
03—Questions
Frequently Asked Questions
How does AMG make money from its affiliates?
AMG receives the Owners' Allocation of each affiliate's revenues, typically 30-50%, in proportion to its ownership stake. The affiliate's management uses the remaining Operating Allocation, typically 50-70%, to pay salaries, bonuses and operating expenses. Because AMG's share is paid after operating costs are covered, it benefits from revenue growth while bearing less of the cost risk, though it participates in growth less than the affiliate's managers do.
Why did net income rise so sharply in 1998?
Most of the increase came from the inclusion of affiliates acquired in 1997 and 1998 (Gofen and Glossberg, GeoCapital, Tweedy, Browne and Essex). Revenue rose $143.2 million, while operating expenses, including $17.4 million of intangible amortization, rose $73.0 million. Minority interest increased by $26.6 million, and income taxes rose to $17.0 million. The 1997 loss was also depressed by a $10.0 million extraordinary item from writing off debt issuance costs.
How risky is the company's reliance on Tweedy, Browne?
The risk is significant. Tweedy, Browne accounted for about 28% of pro forma 1998 revenues and about 56% of pro forma Owners' Allocation ($54.1 million of $143.0 million). Its key investment professionals are not bound by employment agreements guaranteeing their continued service, although each has a contract through October 2007. Poor performance or departures there would materially affect AMG's results.
How will AMG fund future acquisitions and the obligations to affiliate owners?
AMG expects to use its credit facility, which had $173.8 million of availability after the March 1999 offering and can be expanded by $70 million with lender consent, along with additional debt or equity issuance. Put and purchase obligations to affiliate management ranged from $11.0 million to $227.5 million at year-end 1998, depending on how the obligations arise. These could increase borrowing, raise interest expense or dilute existing shareholders if settled in stock.
What are the main risks to the valuation of AMG's intangible assets?
AMG carried $490.5 million of acquired client relationships and goodwill at year-end 1998, amortized over 9 to 35 years. Any impairment, shorter amortization periods, or accounting changes such as the FASB's proposed goodwill amortization rules could reduce reported earnings or require write-downs. The company recorded impairments of $4.6 million in 1996 following client withdrawals at one affiliate, showing that such charges can occur when affiliates lose assets.
04—Continue