As I get older – and perhaps more cynical, I find that the more the asset management industry gets excited by things that are new, different and radical; the more I seem to find that those same new, different and radical developments are really just a return of ideas from the past.
Normally, of course, I say nothing. Being a father of five has taught me that droning on that ‘nothing is new’ generally invites derision. However, reading the news from the sector over the last few months really has made me feel better; not only is history repeating itself but, magically one of my published comments the first time around is looking quite prophetic. This happens so rarely that I felt compelled to put pen to paper.
In 2016 Denver based Janus Capital and London based Henderson merged. As usual, the Joint CEO’s (yeah, I know) waxed lyrical about “combining strengths”, “consistent cultures” and made bold commitments to specific targets for increased new business, expanded client coverage and, one of the joint CEO’s even claimed that the merger would create “truly global active asset manager that is well-positioned to succeed in the investment marketplace”.
I admit to being rather negative at the time. I commented in the FT that “this is a merger based on weakness rather than strength”. This might have sounded churlish but, with hindsight I think that I was justified in thinking this.
At the point of the merger announcement, the combined firms had $320bn of assets and a combined market capitalisation of $6bn – impressive. But Janus Capital’s own AUM had reached $300bn in the early 2000s; so, one of the firms which was merging and bringing it’s ‘strengths’ to the combined business, had actually shrunk by over $100bn in size in the last decade. Before you feel sorry for the Janus shareholders, it’s worth mentioning that Henderson had only grown by just over 30% in the same 13-year timeframe – hardly dynamic, and a lot less than the market over that period.
In fact, the two firms combined were larger in terms of AUM and profitability ten years before the merger than on the day they announced their nuptials. Worse still, the market capitalisation of the merged business is $4.8bn today, but it was a much healthier $6bn three years ago when the merger occurred. There will, of course, have been some share buybacks during the period but it’s fair to say that on any measure, the Janus/Henderson merger won’t be celebrated by shareholders.
But of course, the story doesn’t end there. Janus Henderson – now minus a joint- CEO – is in the headlines again. Trian Partners, the activist vehicle of Nelson Peltz is a shareholder in both Janus Henderson AND Invesco and is now advocating a mega-merger between the two.
In many ways it’s a fantastic fit. Just not in the way its protagonists might have us believe.
Invesco has spent most of the last two decades and more indulging in a series of mergers of its own, most notably the purchase of Oppenheimer funds for $5.7bn in stock in 2018. Of course, at the time CEO Marty Flanagan waxed lyrical about how the new firm was poised to offer scale and choice to its clients.
Unfortunately for Marty, it hasn’t worked out that way. In 2010 Invesco’s market capitalisation was approximately $10bn. In 2020 – even after issuing new shares to buy Oppenheimer for $5.7bn – Invesco was only worth $7bn. Even adjusting for share repurchases, Invesco’s own website shows that shareholders would have suffered a total return of -32.55% over the last ten years. Over the last five years despite all the merging and cost-cutting, net income at the firm is pretty much flat.
At least it might be said that Invesco and Janus Henderson’s shareholders have something in common even if it’s only some useful losses to offset against gains elsewhere in their portfolios.
So, the horse is being saddled again and another merger may be on the cards. Who’s to say that in ten years’ time someone like me – or perhaps even a much older real me – will be sitting down with a cup of coffee to point out where Janus Henderson Invesco Inc has gone so badly wrong and why its newly announced merger with x or y or z is a really bad idea?
In fairness to Janus Henderson and Invesco, they are far from the only firms to fit this mould. In some ways, Aberdeen Standard would have been an even better example – but perhaps less newsworthy. Who’s to say that Franklin Templeton – itself the creature of a mega-merger isn’t going to have the same experience with its latest attempt to become relevant by buying Legg Mason – another unloved merger addict from the past.
Already the articles are being written and the frenzy is building – as the FT reported this week; the race is on to be a member of $5trillion of assets under management ‘club’.
I’m sure there are some wonderful people working hard at these firms that I’ve mentioned and, undoubtedly amongst the literally thousands of products they all have, there are some which are genuinely world-class. It’s just that there really can’t be that many – or at least not enough to make a difference. Most of what they do is done better elsewhere.
You see, the decline in AUM, the persistent leakage of assets, the poor shareholder returns and the failure to add any value whatsoever from incredibly expensive and disruptive M&A is against the backdrop of a near 13-year bull market in equities and fixed income and a market awash with liquidity. These are the very conditions that the phrase “ a rising tide floats all boats” was meant to reflect. The sad and stark fact here is that whatever the ambition and promise of these mergers and the strategic plans, investment programmes, investment banking fees and rigorous cost-cutting which followed, the clients just don’t want what they’re being offered. Other than in very limited circumstances, I’m not hearing clients say “I chose my manager because they are big”.
It’s not just in terms of shareholder return that these firms have failed. For much of the last decade, money has been leaking away from their funds and portfolios. Even where they’ve managed to win new business it’s been predominantly for lower margin, beta or enhanced beta style products such as ETF’s or beta-based solutions products and the retention of higher fee assets has generally come at the expense of margins.
We can see these failings best in the market valuations applied to these businesses, which are firmly into the mid-single-digit P/E ratio territory – despite strong balance sheets and the ability to generate cash. These are effectively a ‘run-off’ valuation for businesses of this size, which shows that the market places literally no meaningful value on future growth in the business.
It’s not just about the clients. Clients are attracted by quality and results, and in investment management, that means you need the ability to retain high performing talent. Top performers don’t want to be part of a business which is perceived to be failing. Top performers don’t want to be paid in equity which is worth less than when it was granted ten years earlier. Many of these firms have been losing talent or – perhaps even more damaging in the longer run – have been failing to attract the cream of the new talent – for quite some time.
All of this goes to the core of what we believe in. Attaching an ailing medium-sized business to another ailing medium-sized business does not make a strong large business. Taking two or more businesses with mediocre overall performance and net redemptions just doubles the scale of the problem – it doesn’t fix it. More importantly, it distracts those who might have a chance of rectifying the problems each firm does already with the gargantuan task of integrating cultures, entities and legacy systems and ensures that key employees spend more time on ‘turf-wars’ and positioning themselves for personal advantage than they do thinking about clients, markets or alpha. It unsettles clients, causes investment personnel to take their eyes off the ball and causes significant amounts of additional regulatory pressure and scrutiny.
This is not to say that any M&A activity in asset management is bad – as an acquirer of asset management stakes – it would be an odd stance for us to take. It is simply to say that M&A activity in this sector should only be considered for one of four reasons:
- You’re a large multi-boutique or generalist asset manager and you want to add a discrete, high-quality capability that you don’t already have
- You have a world-class capability in something, and you want to buy out someone who is not as good as you but brings additional scale or geographic reach to your firm
- You’re a scale player in beta or beta plus and you want to add more scale
- You’re a multi-boutique who wants to buy all or part of a boutique and leave the investment management part of the business (or all of the business) alone
What all these examples have in common, is that the business acquiring should never be in a weak position when it does so and, in all but one example here, the acquired business shouldn’t be in a weak position either. M&A doesn’t make the weak, strong; or the mediocre, great. M&A may be part of the strategy, but it isn’t the strategy.