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More deals are on the table amid a bigger-is-better mentality in the asset management space after significant purchases by T. Rowe Price and Franklin Resources, a law firm partner involved in the business told MarketWatch.
Paulita Pike, asset management partner at Ropes & Gray who works on M&A deals in the space, said the $4.1 billion acquisition of Oak Hill Advisors by T. Rowe Price
TROW,
and the $1.75 billion purchase of Landmark Partners by Franklin Resources
BEN,
mark large milestones in a business that’s been keen to scale up. Both transactions were announced in the past week.
In this case, both targets are active in the private investment space and provided both acquirers with new business lines.
“Any M&A or joint venture or any kind of deal in the asset management space is not a surprise,” Pike said. “There has been consolidation for a number of years.”
Players are seeing bigger size as a way to compensate for profit margins that have been squeezed by low interest rates and downward pressure on fees, she said.
Looking ahead, Pike sees more transactions in the pipeline, with multiple bidders on most sales processes.
“We’ll continue to see this very active deal landscape,” Pike said. “I’m expecting more of the same — transactions of every flavor.”
Wall Street of course typically applauds mergers as a way to boost valuations through greater scale and cost savings.
JPMorgan Chase analyst Kenneth B. Worthington praised Franklin Resources for using its balance sheet cash to spur inorganic growth and said the purchase price multiple of 14 times Ebitda for Landmark Partners seems reasonable.
“While it is unclear how successful Franklin will be at further growing the already successful Lexington Partners, we see the acquisition of the faster growing and stable earnings business as value-added,” Worthington said in a research note.
UBS analyst Brennan Hawken on Thursday hiked his price target for T. Rowe Price to $215 a share from $200 and said Oak Hill Advisors (OHA) marks the company’s first acquisition in more than a decade. The business will add alternative investments to its business mix and improve the growth profile of the company, he said.
“While there is likely limited opportunity for OHA’s strategies in the retirement channel, liquid alts are gaining in popularity in the broker sold channel,” Hawken said. “There are opportunities for TROW’s recently enhanced distribution capabilities to provide more avenues for growth at OHA in the future.”
