Source: Reuters
NEW YORK, Sept 17 (Reuters Breakingviews) – Mergers between asset managers are a pit stop in the race to the bottom. Fund manager Invesco (IVZ.N) is in talks to merge with State Street’s (STT.N) asset management arm, the Wall Street Journal reported on Thursday. A tie-up looks valuable on paper, but still leaves both companies in limbo.
Asset managers are struggling to distinguish themselves as passive funds commoditize their business. Last year, the average passively managed product charged just 0.1%, one sixth the fee of an active exchange-traded fund, according to data from Morningstar. State Street has helped speed this so-called fee compression: It is the cheapest fund provider after passive-investment pioneer Vanguard.
For that reason, deals have boomed in the sector as a way for companies to drum up cost cuts. Last year, Morgan Stanley (MS.N) agreed to acquire Eaton Vance for around $7 billion, while Franklin Templeton bought Legg Mason for $4.5 billion. Even Invesco has been on a tear, buying OppenheimerFunds in 2018 and Guggenheim Investments’ exchange-traded funds business the year before.
Morgan Stanley and Franklin Templeton show how deals can be fruitful in this regard. Both estimated they could cut expenses worth roughly 2% of combined revenue through their respective acquisitions. That suggests State Street and Invesco, which combined would have more than $5 trillion in assets, could generate $160 million in savings that would be worth almost $1.2 billion after taking taxes into account. If Invesco ended up with 75% of the new firm, roughly its proportion of contributed revenue, this implies a nearly 8% lift to its share price, slightly more than where stock was trading on Friday.
That’s not a horrible outcome, considering the $12 billion Invesco’s shares have risen just 11% in the past three years. Still it doesn’t do much to change the fee-crunching trend. Deals between asset managers can create new problems, too, as fund managers leave, demand chunky sums to stay or just grumble over culture clash. In this case, Invesco takes in about $3.40 for every $1,000 it manages, on average, while its putative merger partner collects just 48 cents. These two share a street, but reside on different sides.
CONTEXT NEWS
– Invesco is in talks to merge with State Street’s asset-management business, according to a report on Sept. 16 in the Wall Street Journal citing people familiar with the matter.
– Invesco shares were up 6% in early trading on Sept. 17.
Column by Lauren Silva Laughlin in New York and Aimee Donnellan in London. Editing by John Foley and Marjorie Backman
