Invesco (IVZ) Reportedly in Talks to Merge With State Street's (STT) Asset Management Business, Citi Sees More Cons than Pros
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Given that State Street’s asset-management business manages almost $4 trillion in assets, this would mark one of the biggest mergers in this industry. At this point, it is still unclear whether the merger will be completed. STT has already failed to find a suitable partner for its asset management business, the WSJ report adds.
Invesco manages $1.5 trillion in assets, including a large ETF business. The company has a market capitalization of about a third of the total STT market cap.
Citi analyst William Katz has weighed in to note that the most likely option is that two companies create a joint venture in which IVZ and STT contribute respective platforms. On the pros of such a deal, Katz comments:
“First, on paper, such a deal might be modestly EPS accretive, depending on the interplay between synergies and pro forma ownership. Second, a combined company would also be significantly more scaled, including major leg up in Passive, which may accelerate IVZ’s ability to invest for future growth. Third, given mostly Passive and Cash management platform, the likelihood (particularly given current fee rates) of material revenue run-off would be low,” the analyst said in a note sent to clients.
On the other side, the analyst also outlines the following risks:
“First, it is unclear just what STT’s A/M platform strategically offers IVZ, which is the key per the CEO’s recent broad comments to effecting deals. Beyond scaling ETFs, we don’t see much improvement against key Industry megatrends. Second, the timing may be difficult, as IVZ is just now rebuilding investor credibility around its own platform, itself a function of several deals. Third, STT’s A/M business, in our view, is an inferior asset relative to IVZ, based on flows, fee rate and margins. In essence, IVZ would be adding on ~$4T of AUM at a blended ~5 bps fee rate, with checkered flows – both historically, and prospectively we believe. Fourth, as a result, pro forma organic growth would be much lower, while pro forma organic revenue growth likely would be questioned,” he adds.
Overall, Katz believes the cons “well outweigh the pros” in such a setting.
Shares of Invesco are up 6.5% in pre-open Friday on the WSJ report.
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