Man Group’s £190m share buyback thrusts spate of M&A deals in the spotlight

Man Group’s decision to return cash to shareholders via a share buyback programme has turned attention to the spate of M&A deals in the UK asset management sector, which some argue do not add value for investors.

A day after Liontrust announced it would be acquiring boutique manager Majedie for up to £120m, Man Group bucked the M&A trend, opting instead for a $250m (£190m) share buyback.

The FTSE 250 asset manager plans to purchase up to 96 million shares between now and 7 December 2022 in a bid to reduce its share capital and meet its obligations on employee share options. It is the second time this year it has offered to buy back shares, having launched a $100m programme in August.

Consolidation has been accelerating since 2020 as the coronavirus pandemic put further pressure on margins, leaving asset managers mulling the best way to scale up to boost flagging revenues.

Over the first half of 2021, there were 62 M&A deals in the UK wealth and asset management industry, a 265% spike from 17 in H1 2020, according to EY. The total deal value was £6.1bn, a steep increase from £0.5bn the year before.

Notable asset manager M&A deals 2021

Share buybacks are less risky

Peter Sleep, senior portfolio manager at 7IM, says buying back a cheap stock is preferable and a less risky approach to enhance shareholder value than acquisition.

Sleep says this is because companies are investing at a known rate of return. On top of this, if a firm buys a lot of its own stock, this will result in a lower share count, which will enhance earnings per share.

By contrast, there is far less certainty buying another business, particularly in the asset management sector where companies are buying a stream of future cashflows, says Sleep. Another big risk is that portfolio managers will leave, or assets walk.

Historically not many active managers have made a success of growing through acquisition. Outflows have persisted at Abrdn and Jupiter despite their respective tie-ups and the former’s market value has halved since it was borne out of the merger of Standard Life Investments and Aberdeen Asset Management.

Trillion-dollar asset manager Blackrock is an outlier, though Sleep argues its success is chiefly down to one acquisition – iShares.

On the flip side, “I can think of lots of companies that have made a mess of growth through acquisition,” he says.

See also: Will Covid prompt even more UK companies to get the ‘buyback bug’?

Difficult to predict if M&A deals will add value

In an analyst note published on Wednesday, Numis said it did not believe a clear enough case had been made that Liontrust’s acquisition of Majedie will add value.

The price paid for Majedie is not cheap, with Numis estimating an implied price to revenue multiple of 3.3-4.4x, more expensive than multiples paid on historic Liontrust transactions that were around 2-3x.

Analysts were also not sold on the idea that the deal will lead to “meaningful revenue synergies,” and noted Majedie is partly exposed toward areas of the market with “notable structural challenges” – UK equities on the fund side and UK local authority pensions by distribution.

“We think management will have to work harder than on previous deals to extract some of the Liontrust ‘magic’ that has worked so well in the past, if they are to achieve meaningful value accretion from this deal,” analyst David McCann wrote.

Hubris behind spate of takeovers

If share buybacks offer less uncertainty than M&A deals, why aren’t more fund groups viewing them as a viable option?

Sleep thinks it comes down to hubris. “I have spoken to a lot of CFOs and CEOs informally and they say it is interesting and fun to acquire, integrate and consequently run a bigger company,” he says.

“Management will also often argue that they can run the new acquired company better than old management, grow it better and add greater value than old management.”

A stock buyback is seen as “tame” by comparison, says Sleep, and “some commentators will see it as an admission of defeat in that there are no areas of organic growth or acquisitions to make”.

AJ Bell head of active portfolios Ryan Hughes thinks deciding which method to return cash to shareholders depends on a firm’s culture and how easily they can digest an acquisition or merger.

For Man Group, a share buyback makes sense given their retail arm, including Man GLG, is “all about attracting high quality fund managers that can bring assets with them or raise assets quickly because of their profile”.

Companies which go down the M&A route will be acutely aware of the execution risk and be willing to stomach disruption for at least 12 to 18 months, he adds.

“Credit to Liontrust – they’ve actually been able to buy up a few different firms and they seem to have got their integration model quite well refined.”

Wave of consolidation will not improve client outcomes

Many in the industry are concerned that the recent explosion in M&A activity will be disruptive to the underlying investors.

The raft of M&A deals in the UK “means that investors are, more and more, finding themselves holding funds where the asset management house has changed through acquisition,” said Quilter Cheviot head of fund research Nick Wood. “Only time will tell what the acquisition means exactly for the underlying funds.”

Hughes says the wave of consolidation is not about improving client outcomes, rather “active managers defending their margin and trying to cut costs in the face of relentless competition from passives”.

While M&A activity may help some investors trapped in subscale, legacy funds, he thinks it is “highly unlikely” these matchups will benefit the end client.

“I’d love to say it’s the reverse – we’re going to see lower fees and better management. But I just don’t think that’s the driving force behind this.”

See also: Defensive Jupiter Merian deal shows fund groups are not safe from M&A