Franklin Templeton entered into a definitive agreement to acquire Legg Mason Inc. for $50 per share of common stock in an all-cash transaction.
The acquisition of LM and its multiple investment affiliates will establish FT as one of the world’s largest independent, specialized global investment managers and deepen its presence in key geographies. The financial behemoth that will emerge as a result of this acquisition will have $1.5 trillion in assets under management.
The $4.5 billion deal will see FT buy LM for $50 per share, a $10 premium to its share price on Monday, and means FT will take on $2 billion of LM’s debt. The deal has been approved by both boards but is still subject to the approval of regulators in the U.S., where both fund companies are listed.
Director of North American fixed-income strategies for Morningstar Karin Anderson expects the new entity to have a much heavier focus on fixed-income - accounting for nearly half of managed assets - with roughly one third in equities. Alternatives, multi-asset strategies, and money market funds would account for the remaining assets under management.
"This shift toward fixed income is the result of Western Asset Management’s significant platform, which accounted for more than half of LM’s managed assets. This will significantly expand FT’s fixed-income business and give it diversification away from the Global Macro Team’s strategies led by Michael Hasenstab, which account for a large share of Franklin’s current fixed-income platform and have experienced significant outflows recently," she says.
The rate of mergers and acquisitions has been picking up across the global funds industry.
For example:
- 2019: Liontrust and Neptune Investment Management
- 2019: Miton and Premier
- 2018: Invesco and OppenheimerFunds
- 2017: Janus and Henderson
- 2017: Standard Life and Aberdeen
Martin Flanagan, chief executive officer of Invesco, said in Financial Times that “The industry is going through dramatic changes. Winners and losers are being created today like never before. The strong are getting stronger and the big are going to get bigger.” He cited the primary drivers as downward pressures on revenues (trend toward nearly-free passive funds), and upward pressure on expenses (rising investments in compliance, technology and cyber security). At the same time, many institutional investors, sovereign wealth funds or private banks are trimming how many companies they work with, which means that asset managers need to bulk up.
Morningstar’s head of fund research Jonathan Miller says that the FT-LM deal is part of the wider trend of active managers consolidating, partly because of competition from low-cost ETF funds. “The sheer scale of this deal would take the new entity into the top six of asset managers globally. While the independence of the LM affiliates is mentioned as wanting to be left intact, this is still a huge undertaking and cost-cutting will clearly happen along the way. Active managers are closely mapping out their future trajectory amid fee compression, outflows and the threat from passive funds,” he says.
In 2018, Bain & Co., opined that medium-sized firms faced a “valley of death” in the coming half decade that would force them to seek refuge in size via M&A. In 2017, the Boston Consulting Group came to much the same conclusion, albeit with the caveat that “growth through acquisition is a winning formula only if it achieves or consolidates a winning business model.”
Anderson says the $734 billion asset manager has grown through acquisitions, and historically, has not interfered with those investment cultures. “That said, Franklin's struggles with outflows in recent years have led to some changes," she says.
LM and its associated companies manage more than $800 billion in assets (as at January 31, 2020). LM operates a multifoliate model. "Legg Mason handles marketing and distribution while affiliates--all owned by Legg Mason--are given investment autonomy," Morningstar senior fund analyst Andrew Miles says.
However, some LM affiliates are not joining the FT group, among them EnTrust, which is buying back its company when the deal goes through.
Jenny Johnson, president of FT, said the deal will help the company expand its multi-asset offering and help plug gaps in its geographic reach, while Joseph Sullivan, chairman of LM, said the two investment companies will keep their independent identities. FT said it “will preserve the autonomy of LM’s affiliates, ensuring that their investment philosophies, processes and brands remain unchanged”.
Written by
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JAMES GARD of Morningstar.co.uk
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EMMA RAPPAPORT of Morningstar.co.au
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LARISSA FERNAND of Morningstar.in