Henderson’s Gartmore tactics clearer than strategy

Henderson’s tactics in its purchase of Gartmore have been clever. What is debatable is its strategic value to shareholders and clients.

The group has locked in key Gartmore managers and beaten Gartmore and its advisers, the mighty Goldman Sachs, down on its price.

It has displayed the kind of short-term tactical acumen you would expect from the firm who bought New Star cheaply two years ago and has since integrated it with more or less unqualified success.

But in terms of long-term strategy, the value of the deal for clients and shareholders is unclear.

First, the price. Henderson has paid three times more for Gartmore than for New Star, although Gartmore’s assets under management are only twice as high as New Star’s.

Henderson could argue valuations were abnormally low in early 2009, and a firm cannot base an ongoing acquisition strategy on absurdly low numbers.

But plenty of investors now think valuations look stretched, given the severe government debt problems in the developed world and unmanageable capital flows in emerging markets.

With that in mind, both clients and shareholders may now be nervous that Henderson will go from having a £121.1m position in cash and cash equivalents at the end of September to debt minus cash of £48m. The leverage is hardly an issue compared with Henderson’s £1.3 billion in equity, but the absence of a cash buffer might be. (article continues below)

Second, Henderson needs far less from the Gartmore merger than it did from New Star.

Despite Henderson’s success in serving institutions, institutional asset management is not a particularly profitable business. By buying New Star, Henderson got a retail brand, assets, managers, cost cuts and everything it needed to boost its profit margins in the short and long term.

The advantages of the current deal are less obvious. Henderson could argue buying Gartmore gives it all of the above or the equivalent. It does not need Gartmore’s retail brand, it could argue, but it would add better distribution in alternatives, potentially an even more profitable business than retail.

The problem is that by retaining so many of Gartmore’s assets, such as fund managers, Henderson is also retaining a proportion of Gartmore’s expenses on areas like salaries and boosting its margins by less.

Fund management mergers also typically cause some assets to leave the combined group, limiting increases in profitability.

It is certainly hard for Henderson to simply watch its mid-sized peers like Aberdeen and Jupiter massively increase their profits and share price, and not be afraid of getting outflanked by its competitors.

But one reason for Aberdeen and Jupiter’s success is stability: establishing a particular culture at the beginning of the last bull market, stabilising it as the bull market matured, retaining it during the bear market and reaping the rewards now.

Aberdeen did admittedly buy parts of Deutsche Asset Management in the middle of the last bull market. But the acquisition added pure profits in the form of additional fund management revenue from Deutsche. Unlike Henderson, Aberdeen did not retain extra costs in the form of its acquisition’s fund managers, which Henderson has locked in with its recent deal.

Ultimately, clients and shareholders recognise fund management is a long-term game, and one crucial element is remaining consistent and keeping trading costs low.

The culture Henderson established with the New Star purchase could take as long as Jupiter’s and Aberdeen’s to bear fruit. It should not be tempted into rushing the process.