US asset manager Franklin Templeton has agreed to buy rival Legg Mason for $6.5bn including debt, in the latest sign of active fund groups’ need to scale up to fend off growing threats to their business models.
The combined business will manage more than $1.5tn in assets, with Franklin chief executive Jenny Johnson at the helm, the companies announced on Tuesday.
The tie-up of two storied names in asset management, both of which suffered investor outflows from their funds last year, is the latest in a series of deals between midsize companies struggling to adapt to competition from passive funds, which charge lower fees for tracking the performance of an index.
Despite this, the tie-up between Franklin and Legg Mason is about “offence not defence”, said Ms Johnson.
“This is not about just bringing together two overlapping platforms and trying to pull out costs,” she said, noting that the groups were only aiming to generate $200m in annual cost savings from the integration. “It is about having an all-weather product line-up and world-class distribution platform.”
Legg Mason shares were up 24 per cent on Tuesday, trading at $50.45, just above Franklin’s $50-per-share offer price in a sign of investor confidence that the deal would go through. The deal values Legg Mason’s equity at $4.5bn, and Franklin will assume $2bn of its debt.
Shares in Franklin jumped 7 per cent.
San Mateo, California-based Franklin said it would preserve the autonomy of Legg Mason’s multiple fund management affiliates, which include bond specialist Western Asset Management and Edinburgh-based equity house Martin Currie.
But alternatives boutique EnTrust Global will not join the new business after its management agreed to buy it back from Legg Mason and take it private.
Ms Johnson said the two companies entered discussions last June and it took a long time to complete the deal because they had to ensure affiliates were willing to come on board. “We jokingly said this is an acquisition of multiple companies,” she said.
Baltimore-based Legg Mason had come under pressure to cut costs and boost profits from activist hedge fund Trian Partners, which owns a 4.5 per cent stake in the company. Trian’s founder, Nelson Peltz, returned to the company’s board last year after a previous five-year stint between 2009 and 2014, together with investment chief Ed Garden.
The deal has received support from Mr Peltz, who said the transaction would help Legg Mason “remain at the forefront of an industry where scale is increasingly vital to success”.
The all-cash transaction differs from recent megadeals in the asset management industry, such as the multibillion-dollar deals that created Janus Henderson and Standard Life Aberdeen, which were funded with shares.
After the deal, Franklin will still have $5.3bn in cash and investments on its balance sheet, which it will use to fund expansion in areas such as sustainable investing and data science, Ms Johnson said.
The deal broadens Franklin Templeton’s product offering and provides it with exposure to new asset classes such as infrastructure, real estate and quantitative multi-asset solutions. It comes at a key time for the company, which has been hit by heavy outflows from some of its flagship fixed-income funds in recent years.
One of the biggest bleeders has been the Templeton Global Bond Fund run by emerging markets guru Michael Hasenstab, which suffered $6.3bn in net redemptions last year, according to data provider Morningstar. Its assets now stand at $26.3bn.
Chris Harris, an analyst at Wells Fargo, said the integration of the two groups may create operational and cultural challenges. “One hurdle would involve combining Legg Mason’s multi-affiliate model with Franklin’s more traditional structure,” he said.
One person close to Legg Mason said there was longstanding discontentment with the company’s leadership among the affiliates.
“I cannot imagine the people at Western, who see themselves as one of the world’s best bond managers, would be too happy about being taken over by Franklin, with all the problems they have had in their fixed income funds,” the person said. “Western think they are hot stuff.”
Joe Sullivan, Legg Mason chief executive, who will work with Ms Johnson to integrate the two groups, said the investment staff at the affiliates would benefit from the deal.
“Has there been tension? Sure,” he said. But Franklin’s efforts to build relationships with the affiliates and offer financial incentives to investment staff linked to Franklin’s shares would help to keep the affiliates on board, he said.
James Hirschmann, chief executive of Western, said he was excited to be joining a company that “value[s] our investment independence and organisational autonomy”.
Additional reporting by Owen Walker