What will the Franklin-Legg Mason merger mean in Asia?
Franklin Templeton Investments (FTI) yesterday (February 18) announced its purchase of rival US fund house Legg Mason to create a $1.5 trillion asset management giant, as the investment industry’s consolidation trend continues.
Both firms have substantial presences in Asia, incorporating both investment and sales staff, and the deal looks set to have big implications for their businesses, headcounts and client bases in the region (see also box below, 'The merger in numbers').
Now is when the hard work really starts, FTI president and chief executive Jenny Johnson admitted during a conference call yesterday. "It’s easy to buy; it’s hard to integrate," she said.
That said, there are certainly synergies. One clear benefit for FTI will be the acquisition of bond specialist Western Asset Management, the biggest of Legg Mason’s affiliate firms, which accounts for $460 billion of the group’s $806 billion in global AUM.
California-based Templeton has been looking to strengthen its regional fixed income capability in Asia, as it has been one of the bigger gaps in the firm’s offering there, one recruiter told AsianInvestor on condition of anonymity. The sizeable team that Western Asset has in Singapore will help remedy that, he added.
But that raises the question of how the Western business will be managed, given that it has its own institutional sales team under Loke Weng-Keong in Singapore. There will likely be overlap with Templeton’s own business development desk in the Lion City.
As with Western, Clarion Partners provides property capabilities missing at FTI, although the real estate manager does not have an Asian investment presence.
Meanwhile, Templeton is not acquiring EnTrust Global from Legg Mason as part of the takeover; EnTrust will go private once more. This might be because FTI already has a liquid alternatives house in the form of K2 Advisors, the headhunter suggested.
Ultimately, the merger will "fill a lot of Templeton’s gaps in one shot, from both an institutional and retail perspective," head of distribution Jed Plafker said during the same conference call. For instance, it will mean that FTI more than doubles the size of its distribution team in Australia and increases the Japanese team by at least fivefold, he added.
A US-based FTI spokeswoman declined to provide details of its specific headcount in Asia-Pacific or to comment on any implications of the takeover for the regional businesses. She referred AsianInvestor to the presentation and conference call involving Johnson and Plafker.
A spokeswoman for Maryland-based Legg Mason said that its affiliates Brandywine Global, Martin Currie and Western Asset had investment staff in Singapore. The group also has a sales presence in China, Hong Kong, Singapore and Taiwan, she added, while Japan is a large standalone business with both investment staff (for Western Asset) and sales.
As for other business overlaps beyond Western Asset, there will likely be departures from the group sales function, the unnamed headhunter said. Neither Johnson nor Plafker provided any indication of the likely number of layoffs during the conference call, but said they expected the merger would take five months to complete.
Legg Mason’s main workforce in Asia is in sales in Hong Kong and Singapore across institutional and intermediaries, the recruiter said. That means there may be spare capacity in those areas in those two markets, given that FTI’s regional head office and sales base is in Singapore.
“There will be cuts in both client coverage areas if other merger deals are anything to go by,” the recruiter added.
But there will likely be less doubling up of staff in China because both firms are just starting to build out there, he said, though there could still be some impact. Both have wholly foreign-owned enterprises in Shanghai.
In Taiwan, there will also be minimal overlap, the recruiter said, as Templeton has a minority stake in its business there while Legg Mason has quite a small presence in the country.
When it comes to investments, FTI – which has a strong emerging markets focus – is thought to have the larger Asia headcount of the two firms. Any doubling up here is likely to be with Legg Mason's equity professionals in Singapore, the unnamed recruiter said.
WHO WILL BE THE BOSS?
Then there is the question of who will lead the new business in Asia. The press release provides no specific information about this, saying only that FTI would preserve the autonomy of, and make no senior management changes at, Legg Mason’s affiliates.
Legg Mason only in October appointed Andy Sowerby as its new regional head, the headhunter pointed out. But Mark Browning, David Chang and Dora Seow have held much longer tenures in their roles at Templeton, overseeing Asia, Greater China and Southeast Asia, respectively. Browning has been with FTI since 1998, Chang since 2000 and Seow since 2001, while Sowerby started at Legg Mason in 2016.
At the global level, Johnson will remain president and chief executive and Greg Johnson executive chairman of FTI's parent company, Franklin Resources. That suggests that a Templeton executive might oversee Asia after the takeover, but as yet there has been no confirmation of that.
Nor did the release say what would happen to the role of Joseph Sullivan, chairman and chief executive of Legg Mason.
THE MERGER IN NUMBERS
Franklin Templeton Investments paid $4.5 billion in cash for Legg Mason and took on $2 billion of the latter's debt in a deal that will see the 12th and 10th largest fund houses by global assets, respectively, become the sixth largest as a combined entity.
This is at a time when scale has become increasingly important for asset managers to achieve greater cost-efficiencies. It emerged late last year that Charles Schwab was acquiring TD Ameritrade, while 2017 saw the mergers of Aberdeen Asset Management with Standard Life, and of Henderson Global Investors with Janus Capital. And in an all-UK deal, Jupiter Fund Management has just agreed to buy Merian Global Investors.
Such deals can strengthen footholds in key focus markets, in FTI's case one being Asia Pacific. Outside the US, FTI has 13% of its AUM in Asia Pacific and 13% in Europe, the Middle East and Africa (Emea), while Legg Mason has 10% in Emea, 6% in Japan and 3% in Australia.
Globally, the synergies between FTI and Legg Mason extend to the balance of institutional versus retail business. Three-quarters of Legg Mason's assets are institutional, while just 25% of FTI's are, FTI president and chief executive Jenny Johnson said during a conference call yesterday. Accordingly, FTI has around 2,000 distribution staff, while Legg Mason has 1,000.
However, the institutional/retail asset mix will be 51%/49% after the merger, creating a healthy balance.
Of the combined group's $1.497 trillion in global AUM, 46% will be in fixed income, 33% in equity, 9% in multi-asset, 7% in alternatives and 5% in liquidity solutions.
This story has been updated to include the expectation of how long the merger will take to complete.