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Bargaining power on takeover trail

Whenever a fund management firm or an IFA business goes under the hammer, the first question on everybody’s lips is: “What’s it worth?”

Axa’s recent buyout of Framlington, for 178m, works out at 4.3 per cent of its 4.1bn assets under management. Some commentators have asked whether this is expensive compared with Aberdeen’s recent buyout of Deutsche and DWS. That deal valued the Deutsche business at up to 256m, although it could see Aberdeen paying only around 154m to acquire probably 40bn of assets under management. This may not be a simple comparison but Aberdeen could be gaining 10 times the assets under management for a similar figure paid by Axa.

Historically, fund management firms have been valued as a percentage of their assets under manage-ment but Britannic Argonaut fund manager Oliver Russ explains this is dependent on the loyalty of the firm’s investors and the stability of revenue it produces.

For example, a company with 10m under management, split between retail investors, each with 1,000 invested, is going to be more valuable as a takeover target than a firm with the same number of assets under management but only three big investors who might all leave at once.

Russ says the 4.3 per cent valuation of Framlington by Axa reflects the fact that Framlington is a business generating strong revenues and with a degree of customer loyalty, especially from retail investors. He thinks the valuation is fair, depending on how Axa go about the consolidation.

Russ says: “If Framlington had 4.1bn under management in tracker funds, then 178m would too much to pay, but Luckraft, Thomas and Whiteoak are pretty good and it is worth paying extra. However, the assets tend to follow star managers out of the door and it is usually the case that the stars are less tied in than the acquirer likes to make out. The likes of Luckraft would prefer an entrepreneurial boutique environment and the fairness of the valuation will depend very much on how hands-off Axa are going to be.”

Using the profit/earnings ratio often used for pricing companies, the Framlington deal looks very reasonable from Axa’s point of view. It made a profit of 12.2m last year on revenue of 50.4m, so the 178m that Axa has paid is just under 15 times the profit the company was making, for a popular fund manager that fits in with its strategic plans.

Schroders and Henderson have also been the subject of buyout speculation. Schroders’ share value rose recently on rumours that a company was moving in. With Schroders valued at around 2.5bn, it is trading at just over 2 per cent of its assets under management, considerably less than Framlington’s valuation. However, Russ says this reflects the somewhat lower margins on its new business in comparison with Framlington which is a smaller, faster-growing firm.

A spokeswoman for Aberdeen says the firm expects to lose around 10bn in assets under management from Deutsche following its acquisition. Before the buyout, Deutsche, including retail arm DWS, had 46bn. The figure of up to 256m that Aberdeen is to pay for the firm will be finalised on June 30, 2006, depending on how much in the way of assets is left.

The Aberdeen spokes-woman says: “Aberdeen had assets of 25bn before the takeover and Deutsche had 46bn. We expect the combined assets under management by next June to be 65bn, which assumes that the value of Deutsche will shrink. Local authority pension schemes, for example, will have to repitch as a result of the buyout. It is hard to value fund manage-ment firms with this in mind but that is why the deal has been structured as it is.”

A figure of 265m would be around 0.58 per cent of 46bn, making DWS an inexpensive buy for Aberdeen. It seems the buyer is in a good position, after hard negotiations and inside sources at DWS say the deal has been remarkably cheap for Aberdeen chief executive Martin Gilbert – a real bargain.

When it comes to buying an IFA firm, valuation is even more complicated, says Bates head of investment research James Dalby. When The Money Portal bought Bates Investment Services in October 2003, the amount was never disclosed. Dalby says IFA firms are valued partly on their assets under management but also on the recurring income generated from those assets.

He says: “It is much less easy to value an IFA than a fund management house. For example, most investment bond business in the past generated no trail commission. It sounds great to have lots of assets under management but this can also be a liability as IFAs continue to have to service those clients, without being paid anything to do so by providers. By contrast, fund management houses are always being paid for the money they are running.”

Dalby points out that with-profits bond sales were strong in the 1980s and 1990s, with strong initial commission rates, but when things turned down in the bear market, the value of recurring income from those assets came to the fore. Dalby says Bates’ brand was also a key factor in its valua-tion by The Money Portal.

Fund firms face increasing consolidation over the next year and will be valued depending on the pedigree of their fund managers and the bargaining position of their acquirers, the mix of assets under managements and profitability.


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