Fund firms seeking distribution to the qualified plan market woke up to a new reality on Friday morning. After a spate of rumors Thursday night, ING Group's
top brass stepped forward this morning to confirm that they had sealed a $893.5 million deal to purchase the CitiStreet retirement administration businese. The sale is the largest in both price and retirement accounts to hit the market to date.
For fund firms, the deal is a mark of the continued consolidation in the market. That consolidation may close more segments of the retirement market to fund firms that are not able to win shelf space with the top distributors.
For CitiGroup and State Street -- the joint owners of CitiStreet -- the sale marks their exit from the administration side of the defined contribution and defined benefit business. That the two partners were shopping the business was first reported by the MFWire.com's sister publication last year (401kWire: 12/13/2007
For Citi, the sale of the arm raises needed cash and frees it to distribute third-party recordkeeping platforms through its Smith Barney sales force. Indeed, with the sale only Merrill Lynch and Wachovia will continue to offer their own retirement platforms among the five major wirehouses. Morgan Stanley and UBS had each already exited the business.
Meanwhile, State Street's leadership had little interest in remaining in the business after Citi decided to sell the unit to raise capital, according to a top executive at a rival retirement plan administrator. That source said that State Street is instead focusing its resources on the higher margin wealth management business.
CitiGroup's sale of the unit became easier after the bank sold its Smith Barney asset management business to Legg Mason. As part of that deal, Legg Mason was given distribution through the Citi sales platforms for its mutual funds. However, ING is expected to use the newly acquired retirement administration arm to distribute its own funds and annuities.
For ING -- an Amsterdam, Netherlands based financial services conglomorate with roots in insurance in North America -- the sale immediately makes it the number two provider in the defined contribution business behind Fidelity Investments.
"This acquisition significantly expands our existing footprint in our retirement services businesses in the US and will help drive long-term growth in the US retirement savings marketplace," Tom McInerney
, CEO of ING Insurance Americas, stated in a release.
CitiStreet will bring ING more than 16,000 plans and 12 million participants. CitiStreet had more than $262 billion in assets under administration as of March 31, 2008 and approximately 3,700 employees. ING currently has around 3 million participants.
Those employees were a big part the draw for ING. "We are delighted to welcome CitiStreet management and employees to ING. One of the things that attracted us to CitiStreet was the experience and expertise of its employees," spokesman for ING told the 40kWire
"The company that bought CitiStreet had to be had to comfortable with disparate markets," Fred Barstein, CEO of the 401(k) exchange, told the 401kWire
CitiStreet's business covers a wide variety of different retirement market segments with many business models. Those markets include the large plan business where employers often tap a variety of asset managers, to the small business which is more bundled and in which many plans rely on annuities for investments. CitiStreet is also a major player in the public plan market in which it administers 457 plans for state and local governments.
While ING is in many of those markets already, it does not have as large a presence as CitiStreet as an administrator for the largest corporate plans. This deal wins it a secure place at the table of those serving the multi-billion dollar plan market.
"ING is a huge provider. Some thought it was losing momentum recently, but this deal quickly puts that [idea] to rest," Barstein said.
"The only other company that would have made sense as a buyer is Great-West, which has a similar business model," Barstein says. A source told the 401kWire
that Great-West dropped out of the bidding in early rounds.
Earlier this year Bank of America emerged in media reports as a leading bidder on the business. However, a source familiar with the auction says that Bank of America was not among the final three bidders after having dropped out earlier.
On Tuesday ING had signed a letter of intent that gave it a 30-day window to conduct final due diligence and prepare its ultimate offer, according to one source.
Citi was advised by its Institutional Clients Group. Meanwhile, Goldman, Sachs & Co.
advised State Street. ING was advised by Lazard.
The acquisition is expected to close, pending customary closing conditions, by the end of the third quarter of this year.
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