News broke over the weekend that £3.75bn market cap Aberdeen Asset Management (LSE: AND) and £7.5bn market cap Standard Life (LSE: SL) were in merger talks that would create the UK’s largest independent asset manager. The companies have now confirmed that their respective boards are engaged in discussions and intended to continue their conversation despite the premature press coverage.
As to the proposed deal itself, there will be no cash changing hands, much to the chagrin of Aberdeen shareholders who have seen the value of their holding shrink by more than 35% since hitting highs in April 2015. The deal will instead be all-share, with Standard Life shareholders owning 66.7% of the combined company. For Aberdeen shareholders this would work out to 0.757 new Standard Life shares per Aberdeen share currently owned.
A stroke of genius or folly?
While I generally have a sceptical attitude towards mega-mergers or colossal acquisitions, this deal does on the face of it make considerable sense. Aberdeen’s share price has been hammered over the past two years due to 15 straight quarters of net outflows from its funds, which are heavily skewed towards Asian and emerging market equities that have fallen out of favour with investors. This has put pressure on profits and dividends, but combining with the relatively healthier Standard Life would relieve some of this pressure in the short term.
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For Standard Life the deal would considerably bulk up its fund management operations as it tries to shift itself away from a pure life insurer to more of a fund manager. Both businesses will be highly complementary as well, with Aberdeen’s core expertise in emerging market equities and Standard Life’s in fixed income.
A plan for the future
Looking several years out the thesis behind the deal also passes the eye test. Active managers have been punished in recent years by the shift towards passive investing and an increased awareness on fees from investors of all stripes from mom and pop retail investors to massive pension funds and Warren Buffett.
This has put incredible downward pressure on fees across the industry and although this deal wouldn’t completely alleviate this problem, it will allow the combined firm to protect its margins through cost-cutting. Analysts reckon that around 10% of the combined company’s 9,000 strong workforce could be shown the door.
Job cuts, efficiencies of scale and being able to offer prospective investors a wider range of in-house fund options is just what both companies need to compete against American giants like Blackrock in this new cut-throat environment. It’s still uncertain whether this deal alone will be enough for the combined Standard Aberdeen to thrive in the tough years ahead. But it definitely improves their odds.
With both firms’ shares trading relatively cheaply at under 14 times consensus forward earnings, investors who have a more bullish view than I on the fate of active managers may find this an interesting point to begin a stake in either company.
