Starting over

Breaking up, the song tells us, is hard to do.

Breaking up, the song tells us, is hard to do. But often it can become necessary, even inevitable. As in private life, so in the business world: Partners to a marriage, or a merger -- however hopeful they may have been in the beginning -- grow apart; differences are condemned instead of celebrated, neglect shades into hostility.

The good news, in some cases, is that a decoupling is exactly what’s needed for one, if not both, of the parties to reawaken and rediscover themselves. Just such a tale of loss and redemption has been playing out in the world of money management at Los Angelesbased Hotchkis & Wiley Capital Management, as Senior Editor Steven Brull relates this month in “Lasting Value,” beginning on page 37. The well-regarded boutique, a favorite of institutional investors, was bought in 1996 by New York brokerage behemoth Merrill Lynch & Co., which was eager to build its asset management business. Then Merrill made its ill-fated $5.3 billion acquisition of the U.K.'s Mercury Asset Management Group and lost sight of the smaller firm, even as H&W’s beloved value stocks fell out of favor during the technology-driven market bubble. In 2001 the parties separated in a painful divorce, with H&W’s management buying out the firm for, reportedly, half of what Merrill had paid for it.

Since then H&W has been on a tear. Thanks to the rebound in value stocks, and some astute picking on the part of its portfolio managers, it has placed at or near the top of its peer group for performance over the past five years, while assets under management have soared from just over $4 billion to $32 billion.

Now the firm, under the careful leadership of CEO George Davis Jr., must find a way to capitalize on that success, while it watches nervously for signs that the long run for value stocks may be waning. It is mulling whether to move into new asset classes, such as international equities and fixed income. Deciding to do that would bring life around full circle for H&W: It was managing money in all of these areas until its marriage to Merrill. Which would mean that it took a breakup to put H&W together again.

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