Cost savings and share-holders looking for a boost to their share prices has led Integrated Asset Manage-ment Corp. to make a share-exchange offer for all the shares of its 46.2%-owned subsidiary, BluMont Capital Corp., that it doesn’t already own.

“There’s no longer a good reason for two separate publicly listed companies,” says Victor Koloshuk, chairman, president and CEO of Toronto-based IAM. “There would be cost savings of about $400,000 a year. And, with BluMont’s capitalization, IAM will have more liquidity and qualify for the Toronto Stock Exchange. ”

Both companies currently trade on the TSX Venture Exchange.

Koloshuk also admits he has heard from BluMont shareholders who are disappointed with their stock’s performance. As a manufacturer and distributor of hedge funds, BluMont’s share price has been hurt by hedge fund scandals. It trades in the 40¢-60¢ range, with a recent close of 54¢ a share.

Those shareholders “would be interested in IAM’s stock, which has performed well,” says Koloshuk.

IAM recently closed at $1.70 a share, with a 52-week low of $1.35 and a high of $2.50 a share. Still, the share price is well up from less than $1 in 2003 and 2004.

If IAM’s offer — one IAM share for every three Blu-Mont shares tendered — is taken up, the mandates of the two companies will move closer together. BluMont will tap into IAM’s expertise to expand into real estate and private equity, offering on a retail level what IAM offers institutional clients.

But IAM’s offer is meeting some resistance. BluMont’s independent board members are refraining from making a recommendation to their shareholders. Instead, they urge shareholders not to tender shares until they have “reviewed carefully” the potential pros and cons set out in the directors’ circular issued Oct. 4.

Specialty investment banking firm Crosbie & Co. Inc. of Toronto, however, has prepared a formal valuation of both IAM and BluMont shares. It finds the IAM offer “inadequate.”

Crosbie & Co. calculates Blu-Mont’s fair market price at 74¢-88¢ a share. The IAM offering places the value of a BluMont share at 58¢, given early October prices for the two stocks — a premium of 16% over BluMont’s share price in early October.

IAM disagrees with Crosbie & Co.’s calculation because it applies a minority discount to IAM’s shares, which reduces the share value used in the valuation by 20%-25%.

IAM’s bid for the remaining 17.9 million BluMont shares — there are 33.4 million outstanding — is open until 8 p.m. on Oct. 27.

BluMont might be well served by further integration with IAM. But it might also do well to continue to implement its strategy independent of IAM, given its track record in the hedge fund business and its history of working closely with strategic partners such as British-based Man Group PLC. Blu-Mont distributes Man Group’s retail products in Canada.

If IAM fails to get all the BluMont shares, the liquidity and price of the remaining shares will be adversely affected, to the point at which BluMont does not meet listing requirements and will be delisted. However, it’s also possible that IAM will increase the price for the remaining shares.

Koloshuk sees a bright future for alternative products. They provide both institutional and retail investors with diversification, he says. And the portfolios with the best investment records include large amounts of alternative products. Yale University’s endowment fund, for example — one of the top global performers, with a 17.4% average annual return in the 1985-2000 period and low volatility — has 60% of its assets in alternative products. Koloshuk maintains investors can do much better with alternatives, as long as the products have good managers. And that’s what IAM believes it offers.

Yet growth has been slower than expected, both for IAM’s institutional products — real estate, private corporate debt, private equity and managed futures — and for BluMont’s offerings. As of June 30, IAM had $3 billion in assets under management and committed capital, including BluMont’s $773 million in AUM.

IAM’s business model is to develop closed-end funds. The money raised in an offering is then invested. New funds are offered when most of the assets in other funds are deployed. This takes time, given the due diligence required for real estate, corporate debt and private-equity investments.

@page_break@The low interest rate environment in 2001-04 didn’t provide a strong incentive for IAM’s corporate loans. As for private equity, many investors prefer a five-year track record before investing; IAM has just three years. And competition is stiff in this area.

Nor have the past couple of years been good for managed futures. And hedge fund scandals have dampened interest in BluMont’s products. Only real estate offerings have been doing well. But in that case, it’s taking time to invest the assets raised.

As a result, IAM reported net income of $1.4 million for the nine months ended June 30, down from $4 million for the same period the year before. Performance fees dropped to $11.6 million in the nine from $18.2 million the previous year. (Except for BluMont’s hedge funds, performance fees are generally recognized near the end of the life of a pool of assets, and none of IAM’s pools were in that position.)

Other revenue — mainly management, administration and redemption fees — was up 15.4% to $16.1 million in the nine months from $14 million in the same period a year earlier.

Operating cash flow after net change in non-cash working capital balances and deferred commissions (at BluMont) was negative $304,129 in the nine months vs a positive $11.1 million a year earlier. Long-term debt was $1.3 million and shareholders’ equity $13.6 million as of June 30.

IAM has 21.6 million shares outstanding. Koloshuk holds 39%; BluMont chief investment officer Veronika Hirsch, 22.1%.

Here’s a look at IAM’s businesses:

> Real Estate. IAM’s controlling interest, currently 76%, in Greiner-Pacaud Management Associates was acquired in 1998. Established in 1982, GPM buys and sells properties, while its wholly-owned subsidiary, Darton Property Advisors & Managers Inc. , manages them.

As of June 30, GPM had $442 million in real estate investments, mainly industrial and commercial, with an average value of $10 million per property. Darton manages $710 million in properties, including GPM properties.

Koloshuk says the real estate operations are doing very well, thanks to the buoyant markets of recent years. Demand from pension funds for real estate investments is growing at a rate that IAM cannot currently accommodate. It takes time to find good properties at a good prices, he says. GPM has generated average annual returns after fees and debt of 13.2% since 1982; returns since 1998 are probably higher still, given the buoyant market.

GPM could use leverage to boost returns but increase volatility. It prefers not to do this, although it would if investors requested it.

GPM has about $120 million in AUM not yet deployed. It expects to raise another $300 million in the fiscal year ending Sept. 30, 2007. According to Koloshuk, GPM expects to surpass the $1-billion AUM level in the next five years. The real estate operations are very efficient, he says, and won’t need much additional staff to handle more funds.

BluMont is considering launching a closed-end real estate product next year.

> Private Corporate Debt. In 2000, IAM acquired First Treasury Corp. (established in 1987) and in 2004 renamed it Integrated Private Debt Corp. As of June 30, it had $400 million in corporate loans outstanding and more than $500 million in additional commitments, including co-investing facilities. Average loan size is $38 million, but the co-investing feature allows IPD to make loans up to $100 million. The loans are in fixed terms of five to 10 years. Again, there’s more investor demand than IPD can be handle.

This business was slow to get off the ground because interest rates were so low in 2001-04 that companies had no incentive to switch to fixed-term debt. With rates now higher, business is picking up. Koloshuk says IPD expects to increase loans by $400 million this year and to reach $4 billion in loans in the next five years. He notes that the banks should be happy to have clients switch their loans to IPD, because banks prefer to focus on fee-based services, an area in which IPD does not compete.

IPD has been hiring and now has 40% more staff than in 2003.

> Private Equity. IAM created Integrated Partners Holding GP One Ltd. in 1998 under the leadership of George Engman, who had formed and headed the merchant banking portfolio at the Ontario Teachers’ Pension Plan Board. Engman and other employees own 42% of the subsidiary. It has been slow going for this business, too, with only $54 million in AUM as of June 30. But IPH is currently in the market trying to raise another $200 million.

IPH also plans a $400-million merchant banking fund specializing in mining investments in early 2007, for which, Koloshuk believes, there will be great demand.

Numerous private-equity funds have started up in recent years, making this a very competitive business. It’s also an area in which it makes sense to keep funds small, because there is a limited amount of good private-equity investments available. Leaving aside the mining fund, IAM expects to have AUM of only $500 million at any one time.

> Managed Futures. Integrated Managed Futures was established in 2003, when IAM acquired Aero Capital Corp., a very successful one-man operation whose president, Roland Austrup, still heads IMF. It is 65% owned by IAM and 35% by BluMont. IMF manages an open-ended managed futures fund for BluMont. IMF had only $20 million in AUM as of June 30.

IMF’s return on its IMFC LP fund is similar to that of the S&P managed futures index. But the IMF fund has higher volatility. It is working on reducing the volatility without sacrificing the return.

Despite a couple of bad years for the managed futures industry, Koloshuk believes it has a bright future. “Nothing comes close to managed futures for diversification, given its lack of correlation with stocks and bonds,” he says.

This, too, is a business that needs to be kept small because it’s critical that other investors don’t know what you are doing in the market. Koloshuk says IMF could handle $500 million in AUM without minimal additional resources and staff.

> Blumont. With $773 million in AUM, BluMont has been successful in a difficult environment. It sells both its open-ended products ($300 million in AUM as of June 30) and $470 million in structured funds managed by Man Group.

Man Group is moving into the Canadian institutional marketplace, but BluMont may continue to offer Man Group’s Canadian retail products. IE