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March 18, 2019 01:00 AM

All eyes on Invesco as deal raises active management stakes

Danielle Walker
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    Stephen Yang/ Bloomberg News
    Invesco CEO Martin L. Flanagan defended the merger, calling it the 'right move' that will help all aspects of the company.

    Analysts and deal experts who have watched Invesco Ltd.'s share price fall 7.6% since it announced it was acquiring OppenheimerFunds Inc. are unsure whether the tie-up will pay off for the money manager, given the $5.7 billion price tag.

    Despite the headwinds facing traditional managers, Atlanta-based Invesco is in essence "doubling down on active management" and increasing its exposure to the challenges that come with it, said Donald Putnam, managing partner at investment banking firm Grail Partners LLC, San Francisco.

    "I agree with people who are skeptical (of the deal) and worried about the share price," he said.

    Historically, asset manager M&A deals have been aimed at filling product line voids so the combined company broadens capabilities across asset classes. On the Invesco-OppenheimerFunds deal, Mr. Putnam said it was "a little too soon to declare this a mistake, but it is certainly a challenge."

    Invesco is also positioning itself to reap the benefits of the combination, which shouldn't be overlooked, he noted.

    "The challenges of active management are very well known, and 95% of the (firms) who are in active management are either taking no action to face the ongoing crisis, or they are actively denying that this challenge exists. They are waiting for active management to come back in favor."

    While it will take time to see if Invesco's wager pays off, management is at least "trying to confront and solve the problem rather than live through it," Mr. Putnam added.

    In October, Invesco announced that it would pay $5.7 billion in stock for Massachusetts Mutual Life Insurance Co.'s OppenheimerFunds unit. The deal, expected to close at the end of the second quarter, is set to make Invesco the 13th largest global investment manager and the sixth largest retail investment manager in the U.S. with $1.2 trillion in combined AUM, the company announced at the time.

    As of Dec. 31, nearly a quarter of Invesco's total AUM was in passive strategies, with active investments accounting for the remainder of assets, according to its fourth-quarter earnings release.

    At New York-based OppenheimerFunds, a predominant portion of its $250 billion in AUM was actively managed, an October presentation from Invesco showed.

    Did Invesco overpay?

    Regarding the deal, Catherine Seifert, an equity analyst at CFRA Research, New York, said: "The street thinks (Invesco) overpaid." The acquisition "diversifies the mix of business, but it's not necessarily going to stem the outflows in their core active business. And (Invesco) paid a lot for something that isn't a huge pivot point for them."

    Despite the price, Ms. Seifert still thinks that the deal is a "step in the right direction (for Invesco). But after a difficult 2018, they have more work to do."

    Invesco's share price has fallen around 7.6% since the deal announcement, and in the longer term, its shares have dropped 35.4% over the three years ended March 13.

    In acquisitions involving public companies, it is typical to see the buyer's shares decline in the near term, often as an indication that "the market doesn't believe in their synergies or the market thinks they overpaid," said Brooks K. Hamner, a vice president on the investment management team at Mercer Capital Management Inc., a business valuation and financial advisory services firm in Memphis. Tenn.

    Lee Beck, a managing partner at Kudu Investment Management LLC, a New York firm that provides capital to asset and wealth management boutiques, said: "Putting two firms together doesn't give you any support to stop or hold off fee pressures that everyone (is experiencing) in the industry."

    As of Dec. 31, Invesco's AUM dropped 5.3% year-over-year to $888.2 billion.

    Over the three months ended Dec. 31, AUM was down 9.5%. Additionally, long-term net outflows were $20.1 billion and total net outflows were $18.1 billion for the fourth quarter, compared to long-term net outflows of $39 billion and total net outflows of $28.9 billion for the year, the company reported in its earnings release.

    After a rocky fourth quarter in the markets, which sapped the assets of many traditional managers, Invesco also implemented a cost savings initiative, which included deferring new hiring and limiting a number of other activities, such as discretionary, non-client related travel, conferences and contractor services, a spokesman confirmed in an email.

    Climbing back

    Since the fourth quarter, however, Invesco's total AUM climbed back to $945.7 billion as of Feb. 28, the company reported in a March news release. The company attributed the 1.6% increase to favorable market returns, higher money market AUM, foreign exchange and reinvested distributions, which were partially offset by net long-term outflows and non-management-fee earning AUM outflows.

    Neal Epstein, vice president, senior credit officer at Moody's Investors Service Inc., New York, said his firm's view on Invesco is that it is very diversified. "And in our ratings approach, diversification is a source of strength," Mr. Epstein explained.

    "I think that this (OppenheimerFunds) deal adds to the diversification in terms of product and distribution positioning. Oppenheimer happens to be very strong in retail … I think that's a positive for (Invesco)," he said.

    "Our bottom line remains that we think (Invesco) is a very strong company and we believe this acquisition is in their best interest. But it does have to be executed well to be as profitable as they want it to be, and that has to be proven," he added.

    In March, Martin L. Flanagan, president and CEO of Invesco, commented in an email to P&I on assertions that the firm may have overpaid for its acquisition of OppenheimerFunds.

    "The combination with OppenheimerFunds will put us in a strong position to better serve clients, grow our business and provide compelling financial returns for shareholders," Mr. Flanagan wrote. "We are highly confident that the complementary investment capabilities, strong distribution team, increased client relevance (five relationships with more than $30 billion in AUM), greater scale and stronger investment performance of the combined organization will help us compete, grow and win in a dynamic operating environment. We could not be more excited about the combination of our two firms, nor feel more strongly that this is the right move for our business, clients, employees and shareholders."

    Client retention key

    As with any asset manager deal, one factor to watch is to what degree Invesco and OppenheimerFunds retain client accounts throughout the combination — "or what business may decide to go elsewhere as a result of it," said Ms. Seifert at CFRA Research.

    In January, the New Mexico Education Trust Board, Santa Fe, voted to terminate OppenheimerFunds as the program manager for its two 529 college savings plans, which had $2.2 billion in combined assets as of Dec. 31, board meeting minutes published on the New Mexico plan's website show.

    New Mexico wanted to avoid a conflict because it had an exclusivity agreement with OppenheimerFunds for the national distribution of its 529 program, said Theodore Miller, executive director of the New Mexico Education Trust Board, in a March phone interview.

    Rhode Island had a similar relationship with Invesco, he explained, meaning "there would be a conflict between Invesco's role with the Rhode Island 529 plan. … It turned out that the much larger firm (Invesco) had an exclusivity agreement with Rhode Island."

    On Feb. 14, New Mexico issued an RFP for a new program manager for its two 529 college savings programs. As program manager, OppenheimerFunds was responsible for the record keeping and administration and also recommended investment managers for the plans, which were subject to board approval, Mr. Miller explained.

    OppenheimerFunds had served as the program manager for New Mexico's 529 plans since 2005, and was terminated ahead of its June 2020 contact expiration, he said.

    A spokesman for the Rhode Island office of the general treasurer said in an email that Invesco remains the distributor for its $5.6 billion adviser-sold 529 plan. The OppenheimerFunds acquisition did not affect the firm's relationship with Rhode Island, he added.

    OppenheimerFunds and Invesco declined to comment regarding the termination.n

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