‘A shrewd deal’ but watch for outflows: What Aberdeen/Standard deal means for clients

Martin_Gilbert_2013_700.jpgAberdeen and Standard Life investors should brace themselves for more outflows as the market awaits details on how the mega merger will play out, analysts warn.

Standard Life and Aberdeen have announced a shock £11bn merger deal, which is set to create the biggest active management group in the UK and the second largest in Europe.

The tie-up between the companies will create a combined group that will run over £660bn in assets.

As revealed by the groups in a statement this morning, the merger is expected to result in cost savings of £200m a year, relative to Aberdeen’s £680m cost base, of which £420m are staff costs, and reports suggest up to 1,000 jobs could be at risk.

The groups indicated the full run rate of the expected cost is not expected to be achieved until three years after completion.

Shore Capital analyst Paul McGinnis says: “Given that you’ve got the uncertainty of the offer period and the extended integration period in these situations you get a pause in the level of people willing to commit to new money while they wait to see how the situation resolves itself, for example which teams are retained or not retained.

“I don’t think having to go through the uncertainty of a merger situation is going to help outflows.”

Analysts say there will be several risks to contend with as part of the deal including client sentiment and net fund flows, market indices, investment performance, currency, staff retention and regulation.

McGinnis adds: “The groups have been quite specific on how the £200m cost savings break down, but the one they haven’t quantified is ‘removing areas of duplication’ in investment management capability, the front office savings where they’ll look at the teams for overlaps. From a fund management point of view, you don’t really want uncertainty to persist for too long there.”

Broker Liberum says costs could be “as high as £250m”, which would result result in earnings per share accretion of between 19 per cent and 24 per cent for the combined group.

Analyst Justin Bates says: “Aberdeen chief executive Martin Gilbert has pulled off a very shrewd deal here, it is a canny transaction.

“Aberdeen hasn’t been in a position to buy anything meaningful and we’ll see more of these kind of deals in the industry. It is too early to say if we’ll see outflows, although it is a distinct possibility.”

Aberdeen has been hit with over £100bn outflows in the past four years.

Bates says while outflows have been significant, Aberdeen remains a major player in the market.

He says: “Brand and scale are all important. If this merger is successful, we would see it as a springboard, from a position of enhanced strength to embark on further deals, possibly US.”

Tilney Group managing director Jason Hollands argues it is important for the combined group to focus on a specific investment strategy to guarantee stability in the flows.

He says: “Achieving greater scale is clearly a way that active managers can reap both operational efficiencies and achieve competitive advantage in sales, marketing and brand recognition. The challenge however is for some strategies and asset classes scale is not always advantageous in delivering outperformance, the ultimate measure of whether active management works. Scale can inhibit the ability to move assets swiftly in a fund and seal off the ability to invest in less liquid securities.

“So as this merger moves from a transaction to the integration phase, clients and advisers will want to see what it means for individual products and teams.”

Standard Life share price jumped 6.9 per cent to 404.7p early this morning, while it has now subdued to 5.80 per cent at 400p.

Aberdeen, which has been downgraded to the FTSE250 last year, peaked towards the top of the index trading up 5.9 per cent at 303.4p. At the time of writing, it is up 4.82 per cent at 300.2p.