Companies Overview
Invesco Ltd.
Invesco Ltd. is an American independent investment management company headquartered in Atlanta, United States, and listed on the NYSE. The firm was originally incorporated under the laws of England and Wales as H. Lotery and Co. Ltd in 1935 and in late 1950s launched its first mutual funds in North America. After 83 years from its establishment, Invesco has a significant presence in the retail and institutional markets in North America, EMEA and Asia-Pacific, serving clients in more than 150 countries. As of September 30, 2018, Invesco was in charge of $980.9 billion AUM.
The company’s robust competitive advantage is represented by the proven strength of its distinct and globally located investment teams with well-defined investment disciplines and risk management approach, offering a comprehensive range of active and passive investments solutions, which include money market, balanced, equity, fixed income and alternatives. Currently the amount of AUM in active investments is $727 billion, accounting for 74.1% of the total, while passive investments are approximately $253.9 billion, accounting for the remaining 25.9%.
Since 2000, Invesco has grown through acquisitions, among which:
– ETF firm PowerShares Capital Management in 2006;
– Morgan Stanley’s Retail Unit in 2009;
– Guggenheim Investment’s ETF business in 2017
– OppenheimerFunds, the subject of this article, in 2018.
MassMutual Financial Group
MassMutual Financial Group is an American financial services organization founded in 1851 and based in Springfield, MA. The core activity of the group is life insurance and being a mutual company its customers, policyholders, have ownership of the organization and receive dividends on a pro rata basis (more than $1.5bn in the past four years). Besides being one of the largest US life insurance companies, MassMutual Financial Group is also active in Asset Management through two affiliates: Barings LCC ($275+bn in AUM) and OppenheimerFunds, Inc. The group generated $26.113bn in revenues and $137mn in net income during 2017 fiscal year.
OppenheimerFunds, Inc.
OppenheimerFunds, a subsidiary of MassMutual, is a global asset manager. The firm was founded in 1959 and as of today has more than 2,000 employees, out of which more than 170 are investment professionals spread across New York, Dallas, Seattle, Denver, and Rochester. The company serves a wide range of clients, including financial advisors, individual investors, small businesses, and institutional investors, offering active and passive investments solutions in every major asset class, both traditional and alternative. As of September 28, 2018, the company had $246 billion in AUM.
Industry overview
The asset management industry is experiencing an intense pressure on revenues as investors flock to low-fee, passive index and exchange-traded funds. Asset Management firms have been grappling with the shift to cheaper exchange-traded and index funds and away from active funds, which have lagged behind during much of the nine-year bull market. That has sparked a fee war that is steadily eroding margins. Also, the transparency on costs and charges brought by MiFID II is further pressuring mid-tier asset managers in favour of the industry behemoths, like BlackRock and Vanguard, who are gathering ever larger volumes of assets as investors take a flight to solid institutions.
“We are in a once-in-a-generational change, and it’s happening at a faster pace than I ever imagined. Every single day, the strong are getting stronger and the weak are getting weaker,” says Flanagan (CEO of Invesco Ltd.).
One way for asset managers to protect margins is to gain heft, which is the reason why the pace of acquisitions in the sector has quickened for three consecutive years and is now running at its fastest since 2014, according to data provider Refinitiv. The Invesco acquisition of OppenheimerFunds, which have been speculated for weeks, is just the last of a long list of megadeals that created industry giants in the recent past: in May 2017 the $6bn merger deal between Henderson Group and Janus Capital was completed; in July of the same year, Amundi Group acquired Pioneer Investments for €3.5bn creating a European champion with $1.7 trillions of AUM as of December 2017; the following month Standard Life Aberdeen plc (SLA), with $871bn AUM, was created through a staggering $14.3bn merger deal.
Yet many managers remain reluctant to consolidation, mindful that the stock market’s rally has driven up prices on potential acquisitions. Others worry potential deals would accelerate the outflow of client money. Analyst Glenn Schorr of Evercore ISI said that the market will likely struggle in his note titled “A Bigger Melting Ice Cube,” with why they should be excited about getting bigger in a product that is in secular decline” even as investors may appreciate the financial accretion and understand the benefits of scale and diversification.
Although it may be an uphill sell for investors, recent efforts by asset managers to grow through mergers haven’t turned out to be immediate success stories, as reported for Standard Life Aberdeen: since the merger, the supposed “formidable player” in global asset management is experiencing a worrisome flight of top investors and top portfolio managers . And going at it alone isn’t working well either: Franklin Resources Inc. was downgraded in June by Moody’s Investors Service. It was the first cut to a single-A asset manager’s rating in five years.
Deal Rationale
The surge of exchange-traded funds, index funds and other low-cost passive investment options has spurred investment firms to lower costs, sparking a fee war that is progressively eroding margins. The shift has pressured asset managers to diversify offered products, consolidate their businesses and merge with their peers. In recent years, Invesco rode the wave of innovation, snapping up businesses from Jemstep in 2016, a robo-advisory firm, to Guggenheim Partners’ ETF business and European ETF specialist Source in 2017. Beside diversification, asset managers must gain heft in order to protect margins, and in order to get that scale Invesco said it would buy OppenheimerFunds. The transaction is the largest in the US asset management industry since financial services firm TIAA-CREF bought private equity-owned fund manager Nuveen Investments for $6.3bn in 2014, according to the data from Refinitiv and Dealogic. Indeed, the purchase will lift Invesco’s assets under management to $1.2tn, making it the 13th largest global investment manager, the 6th in the US.
Secondly, the high complementarity of the two companies’ investment and distribution capabilities will enhance the combined entity’s ability to meet both institutional and retail clients’ needs across the globe. On the one hand, Oppenheimer offers high performing investment capabilities in areas where active managers are still in demand, such as emerging markets, and has a strong US-third party distribution platform. On the other hand, Invesco benefits from a diversified range of products supported by technology-enabled solutions.
But Invesco can benefit from new synergies with MassMutual as well. As a matter of fact, the deal structure (which will be discussed in depth below) allows the creation of a strategic partnership with the seller, the insurer MassMutual, that will become Invesco’s largest shareholder with a 15.5% stake. As in the MassMutual deal’s announcement, the insurer aims “to participate in the future growth of the combined entity as a long-term partner and shareholder” and continue to benefit from a powerful and diversified global asset management business. Invesco, instead, can tap MassMutual’s career life-insurance agents fleet, who are licensed to sell mutual funds and variable annuities, products which can be supplied by Invesco.
The aforementioned business synergies and economies of scales will translate into high financial returns to Invesco’s shareholders. According to the company, earnings per share will increase by 18 per cent for the three quarters in 2019, converging to 27 per cent in 2020. As a mark of confidence in the targets, Invesco announced a 1.2 billion share buyback over two years.
Deal Structure
According to the definitive agreement between Invesco and MassMutual, the Investment management company headquartered in Atlanta will acquire MassMutual’s asset management affiliate, OppenheimerFunds, for a total consideration of $ 5.7 billion.
The two companies agreed on an all-stock transaction, whereby the Massachusetts insurer will receive 81.9 million common shares in Invesco, valued at about $ 1.7 billion based on the closing prices on the day before the announcement, and an additional $ 4 billion of preferred shares, non-callable for 21 years and carrying a 5.9% fixed rate. The 81.9 million shares include roughly 6.6 million shares to be issued as a part of the post-closing conversion of unvested restricted stock awards, currently held by OppenheimerFunds employee shareholders, into Invesco restricted stock awards, according to the companies’ press release.
Upon completion of the transaction, MassMutual will become Invesco’s largest shareholder, with a stake of approximately 15.5%. Therefore, the deal structure entails a long-term strategic partnership that according to Martin L. Flanagan, President and CEO of Invesco, “will meaningfully enhance our ability to meet client needs, accelerate growth and strengthen our business over the long term”.
Under the terms of the shareholder agreement, MassMutual will have representation on Invesco’s board of directors through the appointment of William F. Glavin, Jr., current independent board member of OppenheimerFunds. Furthermore, the agreement specifies a lock-up period of two years for the common stock.
The transaction is subject to regulatory and other third-party approvals and is expected to close in the second quarter of 2019.
Ardea Partners and Bank of America acted as Financial Advisors to Invesco. While Lazard advised MassMutual.
Sources and References: Bloomberg, Companies’ websites, Financial Times, Reuters, Wall Street Journal, CNBC, Barrons BBC
To contact the authors:
Simone Bertani simone.bertani@studbocconi.it
Vladimer Choghoshvili vladimer.choghoshvili@studbocconi.it
Luca Ranzani luca.ranzani@studbocconi.it
Davide Martellozzo (Editor) davide.martellozzo@studbocconi.it
Bocconi Students M&A Circle 
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