Industry insiders have predicted more coalitions could follow this year as challenges from the growth of passive investment, increasing regulation and pricing pressures make a “defensive” merger look all the more attractive to firms battling a growing number of headwinds.
Aberdeen was among the firms predicted to be a likely M&A target by Numis as far back as June last year, in what the stockbroker called the ‘inevitable’ move to consolidation in the fund industry.
Others Numis had said would act were Henderson, which bought Janus in October, and Liontrust, which acquired Alliance Trust late last year.
Judging by reactions to the Standard Life and Aberdeen deal, the expectation is it may only be a matter of time before other firms are scooped up – or expand their own tentacles – as increasingly firms see the benefits of ‘safety in numbers’.
They are protecting against the growing industry pressures by increasing the scale of their operations.
Richard Romer-Lee, managing director of Square Mile Investment & Consulting, said he “would not be surprised” if further mergers followed the news of SLI and Aberdeen’s talks.
He said the Aberdeen/Standard Life deal “makes sense for a number of reasons” and would create a “huge business with global reach and global investment opportunities” if approved by shareholders.
The benefits of growing in scale were “obvious” given the headwinds facing the industry, he said.
Darius McDermott, managing director of Chelsea Financial Services agreed, also saw the sense behind the deal as the industry is in an, what he called, “era of increasing cost and regulatory burden and fee compression” in which economies of scale look attractive.
McDermott said: “We could well see more merger and acquisition in the sector but with more than 100 fund management companies in the UK, there is room for it without impacting consumer choice.”
The merged Standard Life and Aberdeen group would control an impressive total of £660bn in assets, making it one of the UK’s largest fund managers, and while the likes of Romer-Lee say the deal was not “purely defensive”, others have pointed to the need for both firms to diversify in order to protect themselves against the likes of passive investments.
Keith Baird, financial services analyst at Cantor Fitzgerald, said: “The rationale for the deal must be diversification for both Standard Life and Aberdeen.
“Standard Life has had success in growing its institutional business but has problems with GARS and mature insurance books. Aberdeen has a large emerging markets business which has struggled.
“Given the headwinds faced by the asset management industry from passive investing, pricing and regulatory pressures, this looks like a defensive deal.”
A final decision on the deal is due in early April, with Morningstar Investment Management saying it would “monitor the plans with interest”.
Morningstar analyst Mark Preskett confirmed the deal looked like “a reaction to the cost pressures that active management is under from passive investing”.
With almost all agreeing headwinds could push more firms towards the M&A route, the question is, who will be predator, and who will be prey?
