Aberdeen Asset Management and Standard Life announced this morning they have reached a recommended all-share merger deal, which would create "a formidable player in the active asset management industry globally" running over £660bn of assets.
After confirming merger talks over the weekend, Aberdeen and Standard Life said an agreement has now been reached and they are recommending the deal to shareholders.
Shares in both financial firms soared in early trade this morning as investors digested the news. On opening, Aberdeen shares jumped 6.8% to 305.90p, while Standard Life shares leapt 9% to 412.70p.
Under the terms of the agreement, Aberdeen shareholders would receive 0.757 new Standard Life ordinary shares for each Aberdeen share currently owned.
Based on this exchange ratio and the closing price of 378.5p per Standard Life share on 3 March 2017, the merger values each Aberdeen share at 286.5p and Aberdeen's existing issued ordinary share capital at approximately £3.8bn.
Following completion of the merger, Aberdeen shareholders would own approximately 33.3% and Standard Life shareholders approximately 66.7% of the combined group on a diluted basis.
It is intended the merger will be implemented by way of a court-sanctioned scheme of arrangement between Aberdeen and the Standard Life shareholders. However, Standard Life reserves the right to implement the merger by way of a takeover offer.
The merger agreement does not include a breakup fee, with Martin Gilbert, CEO of Aberdeen (pictured) saying "we are not going to walk away from this deal".
In the event of a formal merger, Keith Skeoch, CEO of Standard Life, and Gilbert would become co-CEOs of the combined group, while Bill Rattray of Aberdeen and Rod Paris of Standard Life would become CFO and CIO respectively.
Standard Life chairman Sir Gerry Grimstone would become chairman of the new board, with Aberdeen's chairman Simon Troughton becoming deputy chairman.
It is envisaged the board of directors of the combined group would comprise equal numbers of Standard Life and Aberdeen directors.
A combined group, which will be headquartered in Scotland, will in due course be branded to incorporate the names of both Standard Life and Aberdeen.
Commenting on speculation about potential job losses, Skeoch said: "As we put the two businesses together, there will be some synergies, but we want to talk to our people first.
"Our focus is on investing in innovation and growth and both our organisations have strong records of growing the business."
The groups said the two firms have achieved long-term success through different but complementary strategies that have "delivered attractive growth and returns for clients and shareholders".
It said the merger represents an excellent opportunity to leverage the companies' strengths to create "a world class investment company".
Standard Life added the merger would expect to create an investment group with strong brands, leading institutional and wholesale distribution franchises, market-leading platforms and access to long-standing, strategic partnerships globally.
It would also deliver through increased diversification an enhanced revenue, cashflow and earnings profile and strong balance sheet that is expected to be capable of generating attractive and sustainable returns for shareholders, including dividends.
The firms pointed to complementary investment strategies, with Aberdeen offering products in the smart-beta space, while Standard Life runs a strong absolute return franchise; strong capabilities in fixed income, with credit funds run by Standard Life and emerging market debt strategies offer by Aberdeen; the latter's EM equity capabilities against Standard Life's developed equity offering; as well as property funds and private market investments.
Another potential benefit, among others, includes material earnings accretion for both sets of shareholders, according to the group.
The Standard Life directors expect pre-tax cost synergies of approximately £200m per annum. It is expected that the full run-rate synergies will be achieved three years after completion of the merger.
- These include efficiencies from simplifying and harmonising platforms (approximately 31% of the identified synergies). Savings are envisaged from consolidating the operating, trading and other platforms used by both organisations, as well as through a reduction in the number of third-party service providers.
- Eliminating overlap in distribution (approximately 16% of the identified synergies). Savings are expected in Standard Life's and Aberdeen's complementary distribution networks by consolidating operations where Standard Life and Aberdeen both have a presence in the same location.
- Rationalisation of central functions across the combined group (approximately 12% of the identified synergies). It is anticipated that central functions will be merged and Standard Life directors believe the scalability of these will allow for substantial savings.
- Further savings will come from rationalising the property portfolio and related property management fees, reduced travel costs and in legal, professional and consultancy fees, as well as other sources such as removing areas of duplication in investment management capability "while retaining the best of both franchises and talent".
It is envisaged that the realisation of the quantified cost synergies will result in one-off integration cash costs of approximately £320m in aggregate.
Commenting on the merger, Keith Skeoch, CEO of Standard Life, said: "We have always been clear that it is Standard Life's ambition to become a world-class investment company and that this would be achieved through continued investment in diversification and growth, coupled with a sharp focus on financial discipline. We are therefore delighted that this announcement marks another important step towards achieving that ambition.
"The combination of our businesses will create a formidable player in the active asset management industry globally. We strongly believe that we can build on the strength of the existing Standard Life business by combining with Aberdeen to create one of the largest active investment managers in the world and deliver significant value for all of our stakeholders."
Martin Gilbert, CEO of Aberdeen said: "We believe this merger is excellent for our clients, bringing together the strong and highly complementary investment capabilities of each firm with a breadth and depth of talent unrivalled amongst UK active managers and positioning the business to meet the evolving needs of clients and customers.
"This merger brings financial strength, diversity of customer base and global reach to ensure that the enlarged business can compete effectively on the global stage."
He also added: "We did not have to do this deal, we had a very good future as an independent company if we wanted to. We did this because we genuinely believe that two makes five here, not three.
"We have had four years of outflows, but we have also had four years of making our business more efficient. The combined business will be made stronger when emerging markets come back."
According to Sky News, a formal deal would also involve Lloyds Banking Group - a 10% shareholder in Aberdeen - holding a small minority stake in the business.
Aberdeen has a market value of £3.7bn, roughly half the size of the overall Standard Life business.
The news comes as the global asset management consolidation trend continues to gain momentum. Recently, it was announced Henderson Global Investors is undertaking its own merger with US-based Janus Capital to create Janus Henderson; a group with AUM of more than US$320bn and a combined market capitalisation of approximately US$6bn.
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