The global asset management industry is in a state of upheaval and for many asset managers scale and cost efficiency rank top in terms of strategic priorities. 2020 kicked off with a number of important M&A deals, continuing the high level of recent corporate activity in asset management. Whilst we expect more deals to materialize, it is important to point out that M&A activity can be complex and is not always to the client’s benefit.
The asset management sector, in particular in Europe, remains to be too fragmented with too many funds and also too many asset managers with subpar scale or distribution power. Not only in our view, but consolidation is also inevitable. The scale is increasingly the name of the game and big is not big enough anymore, it seems, albeit we do not necessarily share this opinion. At the same, asset managers need to adapt to ever-changing distribution dynamics. Also, the turnover of CEOs and senior leadership at asset managers has never been higher, which indicates that a lot of strategic change is in the air.
This year already witnessed some major M&A announcements. In January, Amundi, Europe’s largest asset manager, snapped up Sabadell Asset Management, smoothly doubling its AuM in Spain. In addition, and potentially even more important, the deal is also part of a 10-year strategic partnership, which will see Amundi sell its funds via Sabadell’s network of 1.900 branches – similar to the 10-year distribution deal with Unicredit when Amundi purchased Pioneer. At the end of January, Amundi stated to the French media that it has the capacity for further deals as opportunities may arise and we are sure that these opportunities will come through.
Last week, Jupiter Fund Management confirmed the acquisition of Merian Global investors. The combined group would have EUR 78 billion in AuM, creating the second-biggest retail fund manager in the UK. In our view, this is a defensive move towards scale effects and some product/talent diversification, but not about major distribution benefits. The purchase price of GBP 390 for GBP 22 billion in Merian AuM has certainly been attractive to Jupiter. Let’s recall, Merian was valued at GBP 600 million when Merian performed its management buy-out in 2017.
Just one day after the Jupiter announcement, Franklin Resource, the owner of Franklin Templeton, announced the take-over of Legg Mason for USD 4.5 billion – a relatively cheap price – in a deal that will create a firm with USD 1.5 trillion in assets globally. Interestingly, Legg Mason has more AuM than Franklin, but Franklin is – in spite of heavy outflows in recent years – financially much healthier than Legg Mason with remarkable cash reserves. The Franklin / Legg Mason deal makes sense from a scale and also an asset class/expertise expansion perspective. The asset distribution mix is in addition attractive. Franklin manages predominantly retail assets, whilst most assets from Legg Mason derive from institutional investors.
Nevertheless, the deal is complex and carries risks, which are mainly centered around Legg Mason’s affiliates concept, which includes brand names like WesternAsset, ClearBridge, Brandywine and Martin Currie. Affiliate concepts can be beautiful in theory, but in practice, we witness a lot of challenges and (distribution) disputes between the affiliate and the parent company. An affiliate concept being sold and integrated is even more challenging.
How did other prominent asset manager takeovers or mergers fare?
Back in 2009, BlackRock provided the blueprint for large scale mergers in asset management when it acquired Barclays Global Investors and created the world’s largest money manager. In 2016, Amundi announced the acquisition of Pioneer Investments, a deal that also serves as a master model. However, the two prominent deals of 2017, Aberdeen / Standard and Janus / Henderson have yet failed to turn-around their businesses. In direct comparison, Amundi / Pioneer ran the highest AuM per employee, almost 3 times the level of Aberdeen / Standard and double the ratio of Janus / Henderson at that time. Amundi / Pioneer also had the most attractive distribution mix with around 73% of Amundi’s assets being from institutional investors and 74% of Pioneer’s AuM owned by retail investors. Janus / Henderson had almost identical investors type ratios. Aberdeen’s / Standard’s distribution channels overlapped a lot as well. In terms of geographic asset origin, the Amundi / Pioneer and Janus / Henderson deals showed a lot more benefits in comparison to Aberdeen Standard.
Mergers do not provide solutions nor superiority per se. Integrating asset management businesses, its staff and operations is a complex and often lengthy process, which can have a negative impact on the performance of key staff, including fund managers and also salespeople. Unfortunately, often the most talented throw in the towel quickly and move on, whilst less performing staff tends to hold on to their seats as long as possible. The longer the integration takes, the longer the uncertainty remains, the worse it gets. This ultimately affects the client’s outcome and experience.
Dealing with fund house M&A can result in more work for fund selectors
Buy lists, watch lists and ongoing due diligence processes need to be reassessed. Can a fund selector rest at night relying on a corporate communications document drafted by an asset manager’s marketing department? Probably not. However, clear, convincing and coherent messaging about enhanced value propositions, combined with an open assessment of potential obstructions and distractions are vital to engage investors in the M&A process and to retain the investor’s assets. Clarity and openness matter above all. If this is not the case, investors may well step to the sidelines, as we have seen it numerous times in the institutional space.
We expect more M&A in asset management going forward and asset manager names which recently and publicly stated to consider corporate activity include the likes of Asset Management One, Azimut, BlackRock, DWS, Eurizon, Generali, Lyxor, Russell or UBS. Others, like GAM for instance, remain to be vulnerable takeover targets. However, we also expect some surprise moves like the Franklin / Legg Mason deal to come. It won’t be boring …
Philip Kalus
