Caution required over Henderson’s Gartmore bid
Henderson’s bid for Gartmore is a coup for the latter’s advisers. Everyone else should treat it with caution.
Goldman Sachs, which is leading Gartmore’s strategic review, has done a remarkable job courting the London-based asset manager.
Henderson needs neither Gartmore’s brand, nor many of its managers, to improve its business.
It has nevertheless made an offer for Gartmore at a slight discount to the firm’s market capitalisation of £359m at the end of December 16, according to the London Stock Exchange and data from Bloomberg.
The value of the deal is much higher than Henderson’s last transformative acquisition, of troubled firm New Star in April 2009.
The proposed valuation is three times higher than New Star’s enterprise value of £107m. Henderson paid only £45.5m in cash and the rest in shares for New Star.
The New Star purchase, so far, has proved successful. Henderson bought fund management contracts and a turbo-charged retail brand at market lows. It retained key managers and distribution staff, who orchestrated a relatively smooth integration.
New Star’s bankers had swapped its excessive debt burden for equity, meaning Henderson was not saddled with interest payments.
The subsequent market rally also boosted assets under management (AUM) in New Star funds and increased Henderson’s income from management fees.
Now that Henderson has boosted its retail brand and taken on some of New Star’s better managers, would acquiring Gartmore help its clients or shareholders?
As it is impossible to predict the future, the easy answer is that we cannot know - yet. But there are a number of reasons to be cautious.
As Gartmore’s share price is now less than half of what it was when it was listed a year ago, Henderson could maintain it is simply buying management contracts with a brand and a few managers thrown in for free.
It could also argue clients and shareholders will benefit from its larger size, enabling it to spread costs over a broader spread of customers and revenues.
But even if this is true, the price tag is high relative to the New Star purchase.
Gartmore’s AUM are now a little more than twice as high as New Star’s just before Henderson bought it, compared with a valuation three times higher.
Then as now, investors are divided on the outlook for the stockmarket, with strong bear and bull cases being made on both sides. It is not clear market movements will boost AUM in Gartmore’s funds next year.
In its defence, Henderson could argue Gartmore has a more prominent presence in the hedge fund industry than New Star did.
Hedge funds not only command higher margins. They can also, as the name suggests, hedge against market falls.
But this overlooks the fact that Gartmore’s recent problems originate in its hedge fund business.
Not only have Guy and Rambourg, its key hedge fund investors, resigned, but Gartmore recently received a large fine from America’s Securities and Exchange Commission connected with hedge fund investment advice.
Compared with New Star, which swapped its debt for equity, Gartmore still had £79.7m of net debt at the time it announced its strategic review.
Even if Henderson argues it is paying to retain some of Gartmore’s managers, the deal is still subject to the usual risks of merging investment houses, which can suffer from fusing different cultures and teams.
Henderson did a good job of handling the New Star integration, but under oppressive market conditions, when managers throughout the industry had little bargaining power with their employers.
Overall, given the uncertainties involved, all parties might be best served if Gartmore rejects the bid as too low and Henderson refuses to go higher.
Gartmore made great efforts to diversify its business before the merger. It pumped up its retail brand and hired outperforming managers across a range of asset classes, including a successor to Rambourg and Guy.
With a more upbeat attitude from its chief executive and board, it could be better placed to go it alone than it thinks.
An independent Henderson, however, would make a worthy competitor.
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