Merger By Design

You might think that coming out of a year when the Dow Jones Industrial Average surged 30% and the Nasdaq Index rocketed up more than 50%, financial services firms could only benefit from a recovering economy. But John W. Rogers Jr., founder, chairman, and CEO of Ariel Capital Management (No. 1 on the BE ASSET MANAGERS list with $16.1 million in assets under management), the nation’s largest African American-owned mutual fund company, says that in spite of the improving economy, a different set of business challenges for black-owned banks, investment banks, assets management firms, insurance companies, and private equity firms has emerged.

According to Rogers, the current business climate tests a financial services firm’s ability to deal with increased competition and the high expectations of profit-driven investors during a time when most corporations are squeezing margins. Between the heightened regulatory burden on financial services companies and greater scrutiny via the newly enacted Sarbanes-Oxley legislation, many smaller firms that may not have the resources to cover the costs of compliance may find themselves spending more time dealing with regulators instead of working to satisfy the demands of existing clients and expanding their current client base. In fact, due to this ferocious environment in which mutual funds scandals and corporate malfeasance have become rampant, BE has become more stringent in its reporting requirements for our financial services list. For instance, all asset management firms must be registered with the SEC and have all assets under management filed with the regulatory agency. As for investment banks, we ranked firms based on the municipal, equity, and bond transactions recorded by Thomson Financial Securities Data. (See eligibility box.)

While Ariel’s revenues rose 30% last year — 17 companies added its mutual funds to their 401(k) plans — Rogers explains that, “[The Sarbanes-Oxley legislation] poses special challenges for the smaller firms,” and predicts, “You might see some acquisitions occur.”

Indeed, shrinking margins have caused more mainstream companies to go after the bread-and-butter customers of black-owned firms, forcing them to accept a stern reality: Keep growing or be acquired. “You will see more consolidation as time goes on,” says Rogers. “Just a year ago, the brokerage firms were going through a lot of change because of the regulatory environment and problems that occurred on Wall Street. Now it’s time for mutual fund companies to go through similar changes.”

Black-owned asset management firms and investment banks were not the only black-owned financial services firms being challenged to change. All financial services firms are being compelled to target different and larger customer bases and find ways to revitalize operations while delicately retaining existing customers. Black-owned banks, in particular, are facing tremendous competition from the latest round of mainstream bank megamergers, such as the $58 billion J.P. Morgan Chase & Co. — Bank One Corp. deal and the Fleet Bank — Bank of America deal, which was estimated to be worth $47 million.

Seeing the writing on the wall, Boston-based OneUnited Bank (No. 2 on the BE BANKS list with $438.6 million in