PowerShares Bought Out By AIM

January 23, 2006

AIM Investments shells out $60 million – plus big incentives – for the pioneer of enhanced index ETFs.

PowerShares makes good.

AMVESCAP, the parent company of the mutual fund manager AIM Investments, acquired PowerShares Capital Management on Monday, January 23, in a deal that could be worth as much as $730 million.  AIM will pay the pioneer of "active index" exchange-traded funds (ETFs) $60 million up-front, with additional "incentive" payments totaling up to $670 million over the next five years, based on PowerShares ability to continue to grow its assets under management.

The deal is remarkable for a number of reasons, not least of which is that PowerShares is so young: The company was founded in late-2002, and only launched its first ETFs in late-2003.  But PowerShares has been very aggressive in expanding its franchise, and now offers 36 ETFs covering a wide variety of styles, sectors, and countries.  The company manages $3.5 billion in assets, up from just $500 million at the start of 2005.

"The addition of PowerShares ETFs is a natural extension of our core mission to provide a broad range of investment management solutions to our diverse clients across the globe," said Marty Flanagan, president and chief executive officer of AMVESCAP. "Our combination with PowerShares, one of the fastest-growing companies in today's financial marketplace, immediately establishes AMVESCAP as a significant emerging player in exchange-traded funds."

 

The payout certainly validates PowerShares "enhanced index" approach to investing, which uses quantitative and momentum-based strategies in an attempt to beat the market.  No one gave PowerShares much of a chance when they launched their company a few years back, but solid performance by its funds has helped attract both assets and attention.

 

"I've known these products (or their SEC exemptions anyway) since before PowerShares, back when they were held by Nuveen," said Jim Wiandt, publisher of the Exchange-Traded Funds Report.  "I remember when the FITRs failed and I (and I think much of the industry) were sort of like "Good Luck" to Bruce Bond and PowerShares.  Now everyone's his best friend.  You've definitely got to tip your hat to them, because they sweated their way to where they are with hard work, great vision and outstanding execution.  And it seems like they're tapped in to continue with the track they're already on."

 

The deal also validates the entire ETF industry, and is a sign that traditional mutual fund companies are looking over their shoulder as these ETF upstarts gobble up a huge chunk of new investor upstarts.  It's worth noting that the stock market applauded the deal, sending shares of the publicly-traded AMVESCAP up 1 percent to a multi-year high.

 

Here's a summary of the transation:

  • $60 million payable in cash at closing for 100% of the fully-diluted equity
  • First Contingent Payment -- $40 million, payable in cash when management fees (as defined in the acquisition agreement) for any 30-day period total $17.5mm on an annualized basis
  • Second Contingent Payment -- $130 million payable when aggregate management fees total $50 million or more in any consecutive 12 month period in Years 1-4
  • Third Contingent Payment -- Calculated at the end of Year 5 based on compound annual growth in management fees from an assumed base of $17.5 million at closing; Year 5 management fees reduced by $50 million if Second Contingent Payment is earned
  • For a compound annual growth rate (CAGR) in Year 5 between 15% and 75%, $5 million for each CAGR point above 15%, for a maximum payment of $300 million for a 75% CAGR
  • For a CAGR in Year 5 between 75% and 100%, $300 million, plus an additional $8 million for each CAGR point above 75%, for a maximum total payment of $500 million for a 100% CAGR
  • The transaction is expected to be neutral to slightly accretive to earnings in 2006
  • At AMVESCAP's option, up to 35% of the Second and Third Contingent payments are payable in AVZ stock

To reach all of those milestones, PowerShares must grow its assets under management to $112 billion by 2011.   Don't count them out...

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