While investment bankers did not see Franklin Resources Inc.'s acquisition of Legg Mason Inc. coming, on reflection they can see the attraction for the two firms.
Industry observers initially found this deal surprising for a few reasons. First off, despite its large balance sheet, Franklin was not in the habit of making large acquisitions.
"Franklin has had that cash balance for a long time and it wasn't clear if they were ever going to pull the trigger on something big like this or continue to make smaller acquisitions like they had been doing," said one investment banker who declined to be named.
Second, not only was Franklin Resources not in the habit of making large buys, but the small- to midsize deals it typically sought to make in the past were done to boost its alternatives and high-net-worth businesses.
"This goes in the opposite direction, doubling down on long-only management premised on cost savings and distribution synergies," said Domonkos Koltai, partner and co-founder at money management and financial services M&A advisory firm PL Advisors, New York, in an email.
In addition, multiple sources pointed out that the market has begun to cool on big consolidation deals, as demonstrated by the lukewarm reaction to Invesco Ltd. buying OppenheimerFunds — announced in October 2018 — which Mr. Koltai noted "has not been a resounding success."
Another reason the deal blindsided some was because it was a traditional manager buying a multiboutique. As another investment banking source said: "Franklin has never really made a high priority out of acquiring mutual fund businesses and consolidating them."
But upon further reflection, sources said they found that the deal made sense, since it will enhance Franklin Resources' distribution and scale up its fixed-income and alternatives capabilities, as highlighted by the firms' CEOs themselves.
Donald H. Putnam, managing partner at Grail Partners LLC, San Francisco, called the acquisition "a terrific move" for Franklin Resources. It was "large enough to move the needle economically, presenting many operational but few strategic choices, and resulting in no need for dramatic product or marketing change."
Mr. Putnam added that through its acquisition of Legg Mason, Franklin Resources will get more capabilities "across an array of products without having to take the kind of product or recruiting risks that it abhors."
"This dramatically enhances (Franklin Resources') global distribution and presence across geographies, vehicles and channels," said Steven M. Levitt, managing director and founder of Park Sutton Advisors LLC, New York. "There's also some complementary strategies at play, such as real estate and fixed income."
Mr. Levitt added that the deal is expected to result in $200 million in run-rate cost savings over the first year.
Another reason it was a smart buy for Franklin? The price. Franklin Resources is buying Legg Mason for $4.5 billion and taking on $2 billion of the Baltimore-based manager's outstanding debt to create a $1.5 trillion firm.
"Legg's become so cheap relative to its AUM, that it was a very inviting target," said Jim Tennies, president and founder of Baltimore-based investment bank InCap Group Inc. "I'm surprised that somebody hadn't bought Legg earlier."
And future areas for growth have already been identified.
One is in financial technology. "Both Legg Mason and Franklin Templeton were investors in fintech platforms — what's happening to distribution with technology is it's disrupting traditional types of distribution, and so (having a balance sheet that allows for investment) in areas capabilities globally is pretty exciting," said Jennifer M. Johnson, president and CEO of Franklin Resources.
And Franklin's $29 billion subsidiary Fiduciary Trust Co. International, which made two acquisitions already this year, "we think is an underappreciated asset that we have," she said, adding that the firm has already stated its ambition to double the business in size over the next 18 months to two years.