Franklin, Invesco, Janus, and other money managers are prepping for the next wave of deals — keeping balance sheets clean and options open
- The prospect of deal-making is one of the main themes for leaders across asset management right now as consolidation has gripped the industry, particularly in the past year.
- On recent calls to discuss quarterly earnings with analysts, asset management executives described their outlooks on M&A activity.
- Executives have expressed that they are open to deals and expect more consolidation across the industry.
- Franklin Resources closed on its Legg Mason deal earlier this year, Morgan Stanley is set to acquire Eaton Vance, and at least one activist investor appears to be agitating for more industry consolidation.
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Money managers' deal activity has been one of the hottest industry conversations in recent weeks as analysts prodded asset management executives for details: how are they thinking about consolidation during a wave of tie-ups?
Generally, companies' top brass are notoriously tight-lipped on public earnings calls, dodging pointed questions to keep plans under wraps.
But on recent calls to discuss earnings with analysts, asset management executives described their outlooks on mergers and acquisitions, providing clues around where the next deal might be.
In many ways, the industry's evolution is "just getting started," Franklin Resources Chief Financial Officer Matthew Nicholls said on the company's third-quarter earnings call this week.
Still, the firm is laser-focused on carrying out its acquisition of Legg Mason that closed earlier this year.
"I think that's our primary focus, but we are in the flow on these things. We're not shut for M&A by any stretch, if there was something tremendously compelling," particularly to boost the manager's distribution capabilities, he said.
More granularly, in terms of technology platforms that could distribute the firm's products, Chief Executive Jenny Johnson said, "we're always looking at those."
At other firms, executives largely echoed those views: They're open to new deals, even as their own acquisitions aren't far behind, but there isn't an appetite to grow for the sake of scale.
Consolidation among money managers has picked up in recent years as various industry pressures have hurt firms' profitability, not least of which is the rise of passive investments over active, and falling fees.
Read more: JPMorgan and BlackRock are both looking to take part in the massive wave of money-manager mergers. Their execs gave some clues on what they could buy.
Franklin's Legg Mason acquisition that closed earlier this year, Morgan Stanley's bid to buy investment manager Eaton Vance earlier this October, and activist investor Trian Fund Management appearing to agitate for a deal between asset managers Janus Henderson and Invesco have underlined the pace of activity. Reuters also recently reported that Wells Fargo plans to sell its asset management business for over $3 billion.
'I don't think we're desperately missing out on economies of scale at the moment'
Invesco Chief Executive Marty Flanagan — who has led the Atlanta-based manager through the acquisitions of OppenheimerFunds from Mass Mutual and Guggenheim's ETF line — said during the firm's third-quarter earnings call this week that the firm is actively holding conversations with Trian and would not comment further on the matter.
When an analyst asked about deals, Flanagan said the firm's stance hadn't changed recently and a potential target would need to be strategic.
"They need to be differentiated. It has to be something clients want. And I would contrast that to some of the things I've read, that the notion of financial roll-ups is going to be the order of the day. We don't believe in that. It's disruptive. It's risky. And clients are not supportive of it," he said.
Janus Henderson CEO Dick Weil told analysts that he does not think "we're desperately missing out on economies of scale at the moment," citing the firm's 36% margins in the quarter. Janus is "always listening" for potential deals, Weil said, but don't expect anything to come soon.
"If we find something very special that would more than offset the disruption that it brings, we'd certainly be interested in something like that. But the odds of something like that coming along that's such a great fit, that doesn't happen very often," he said, stating the firm would instead grow organically, through fund performance and sales of the manager's products.
But that asset-growing method is expected to be tougher to do in the coming decades, according to a new report from Moody's. Millennials' wealth is lagging behind that of their parents' and grandparents' at the same time in their careers, giving managers a smaller pie to fight over.
"The traditional active management sector will likely shrink over time," the report said.
'We're not looking to get rid of our asset management business'
What underpins every conversation around M&A activity is the Goliaths at the top of the space.
BlackRock, Vanguard, and Fidelity — each with trillions in assets — have used their scale to squeeze the middle class of the industry to this point. For example, Columbia Threadneedle, which merged together at the beginning of 2015, has seen its revenues fall by more than $400 million compared to where it was five years ago.
Read more: Morgan Stanley's big bet on Eaton Vance is the latest in a wave of asset manager M&A. Bankers and industry experts told us the 4 firms that could be the next target.
Leadership at Ameriprise, the Minneapolis-based asset and wealth management firm that owns Columbia Threadneedle, fielded three separate deal-related questions during its Thursday third-quarter earnings call.
Chief Executive Jim Cracchiolo said the firm has been focused on investing in the asset management platform, including its distribution capabilities.
"Now having said that, we think the world continues to consolidate. We agree with that. We think that there may be some opportunities for inorganic, in addition to the organic. So we're very open to continue to explore those opportunities — but we're not looking to get rid of our asset management business," he told one analyst, according to a transcript on the investment research platform Sentieo.
Cracchiolo also said that "we feel good about the mix we have in the product, but "it's not to say that we couldn't add some more in sort of the solution-oriented space or maybe even gain a bit more traction in the leveraging of our international lineup."
Walter Berman, the firm's chief financial officer, told another analyst that Ameriprise could look to add complementary capabilities "somewhere in the fixed-income space and expanded distribution, maybe a little more in the institutional space."
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