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Standard Aberdeen: fund giants agree stunning £11bn merger

Standard Aberdeen: fund giants agree stunning £11bn merger

The boards of Standard Life and Aberdeen Asset Management have agreed to a stunning £11 billion merger. 

After being forced to rush out a statement on Saturday afternoon to confirm they were in merger talks, the pair finalised the agreement over the remainder of the weekend.

According to a 58-page regulatory announcement posted on the stock exchange this morning by Standard Life, the firms will incorporate both their names in the re-brand, with speculation suggesting Standard Aberdeen could be the frontrunner

The move to erase Life from its name would represent the metamorphosis of Standard Life, which was formed 146 years ago, from a traditional insurer to an investment giant.

Under chief executive Keith Skeoch (pictured right), Standard Life has completed its transition from a traditional provider of pensions and life insurance to a modern asset gatherer. Much of the company's growth has been provided by Standard Life Investments, its fund management arm which Skeoch previously ran.

The combined group would overtake Schroders as the UK's largest asset manager, with a market value of £11 billion.  

Skeoch and Aberdeen's CEO Martin Gilbert (pictured left) will become co-CEOs of the combined group. 

Bill Rattray of Aberdeen and Rod Paris of Standard Life would become CFO and CIO respectively.

Standard Life chairman Gerry Grimstone will become chairman, with Aberdeen chairman Simon Troughton becoming deputy chairman

'We have always been clear that it is Standard Life’s ambition to become a world-class investment company and that this would be achieved through continued investment in diversification and growth, coupled with a sharp focus on financial discipline,' Skeoch told the market. 

'We are therefore delighted that this announcement marks another important step towards achieving that ambition. The combination of our businesses will create a formidable player in the active asset management industry globally.'

'We strongly believe that we can build on the strength of the existing Standard Life business by combining with Aberdeen to create one of the largest active investment managers in the world and deliver significant value for all of our stakeholders.'

Gilbert added: 'We believe this merger is excellent for our clients, bringing together the strong and highly complementary investment capabilities of each firm with a breadth and depth of talent unrivaled among UK active managers and positioning the business to meet the evolving needs of clients and customers.'

'This merger brings financial strength, diversity of customer base and global reach to ensure that the enlarged business can compete effectively on the global stage.'

Seven years in the making 

It is believed Grimstone (pictured below) first approached Aberdeen over a potential tie-up seven years ago.

The talks went to the next level last August as the rise of passive investment increased the pressure on active fund managers.

'[The merger] reinforces both Standard Life and Aberdeen's long-standing commitment to active management, underpinned by fundamental research, with both global reach and local depth of resources,' the official announcement read. 

 

'This merger brings together two fine companies and I'm greatly honoured to be asked to chair the combination,' Grimstone added. 

'I look forward to welcoming our new colleagues. We will be successful as long as we continue to put our clients. Customers, employees and good governance at the heart of what we do.' 

Under the terms of the possible all-share merger, Aberdeen shareholders would own 33.3% and Standard Life 66.7% of the combined group. 

The merger values each Aberdeen share at 286.5p, a 0.10 pence premium to its closing price of 286.40p on Friday, meaning Standard Life is coughing up £3.8 billion to strike the deal. 

'The Standard Life directors expect pre-tax cost synergies of approximately £200 million per annum,' the company explained in a statement.

'It is expected that the full run-rate synergies will be achieved three years after completion of the merger.' 

It is thought 1,000 of the combined group's 9,000 jobs could go, although the regulatory filing did not confirm this.

In a joint statement Aberdeen and Standard Life said the merger represented an excellent opportunity to leverage Standard Life and Aberdeen’s combined strengths to create a world class investment company.

The pair highlighted seven compelling rationale for the merger:

* [It would] harness Standard Life and Aberdeen’s complementary, market leading investment and savings capabilities which would deliver a compelling and comprehensive product offering for clients covering developed and emerging market equities and fixed income, multi-asset, real estate and alternatives.

*Establish one of the largest and most sophisticated investment solutions offerings globally, positioning the combined group to meet the evolving needs of clients.

* Reinforce both Standard Life and Aberdeen’s long-standing commitment to active management, underpinned by fundamental research, with both global reach and local depth of resources.

* Create an investment group with strong brands, leading institutional and wholesale distribution franchises, market leading platforms and access to long-standing, strategic partnerships globally.

* Bring scale, as one of the largest active investment managers globally with £660 billion of proforma assets under administration and financial strength, transforming the combined group’s ability to invest for growth, innovate and drive greater operational efficiency.

* Deliver through increased diversification an enhanced revenue, cash flow and earnings profile and strong balance sheet that is expected to be capable of generating attractive and sustainable returns for shareholders, including dividends.

* Result in material earnings accretion for both sets of shareholders, reflecting the significant synergy potential of a combination.

Tough times

Aberdeen, which was formed in 1983, has endured a tricky spell as investors have withdrawn from emerging markets, its area of specialty, resulting in consistent outflows.

In its most recent trading update it reported an outflow of £10.5 billion in the fourth quarter.  

Gilbert has made little secret of his desire to find a merger partner or some kind of deal for the firm.

In November last year he told reporters that he would like to do a deal like the merger between Henderson and Janus, but that there was ‘nothing on the horizon’.

The firm previously explored a deal for the whole of Pioneer when it was up for sale by parent UniCredit last year, before ultimately balking at its price tag.    

‘We were through to the second round but we withdrew,’ Gilbert told Bloomberg in November last year. ‘We couldn’t quite afford the €3.5 billion that it’s going to go for. I wish we could find something, but there’s nothing at the moment.’

While Aberdeen has sought to diversify its business over the years through a series of acquisitions, it has not quite been able to shake off its dependence on emerging markets. 

'The returns from emerging markets have been challenged in recent years, which has particularly impacted Aberdeen given the
importance of emerging markets in the context of the overall business,' Aberdeen said as it explained why it had recommended the deal. 

'Also during this period, the performance of some key investment strategies has not been as strong as it has been in the past and this, together with those broader industry and market trends, has led to a sustained period of outflows.' 

It added: '[While] the board of Aberdeen considers the standalone prospects for Aberdeen to be strong, it has for some time perceived the growing importance of scale, diversification and global breadth as key factors for long-term success as a global investment firm.'

Sanlam UK chief executive Jonathan Polin, who was employed by Aberdeen for nine years from 1994, described the deal as 'another stroke of genius from Gilbert'.

Polin added: 'This is a great and timely deal for Standard and Aberdeen - bringing scale, complimentary capabilities and financial strength.

'It gives the combined business the opportunity to crack the US with a future meaningful deal - an Achilles heel up to now for Aberdeen.

'Strategically more critical is this deal heralds the beginning of the new world where asset managers who want to be dominant global players need to own the entire value chain from manufacturing, to platform to advice.'  

Meanwhile, Standard Life has recently seen the short-term dip in performance of its flagship £26 billion Standard Life Global Absolute Return Strategies.

Annual results released by Standard Life at the end of February showed its investment unit, Standard Life Investments, suffered a £0.7 billion outflow in 2016, with gross flows into Gars falling from £17.2 billion to £10.2 billion. 

'The combined group would benefit from a more diversified mix of business with the increased diversification reducing the market's over-emphasis on Gars,' Jefferies analyst Anasuya Iyer highlighted in a note on the merger. 

Further analysis and insight: 

Aberdeen/SLI merger: the Citywire view

Standard-Aberdeen: what Scottish giant would offer investors

Tale of the tape: how Aberdeen and SLI's managers compare

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