(We have updated the header with the new name for Man/GLG and there’s added comment).
Shares in Man Group are the biggest faller in the FTSE on Monday morning, as investors digest its transformational deal – the acquisition of GLG Partners for $1.6bn.
The early reaction from the market place is that Man is paying a full price for GLG’s pretty exceptional track record – since its first fund was launched in 1997, GLG has achieved a 14.1 per cent annualised return on its alternative strategies and 7.3 per cent on its long-only strategies.
As of March 31, GLG has $23.7bn of assets under management (AUM) and generation non GAAP net income of $81m. This suggests that Man is paying a rich 6.75 per cent of AUM and almost 20 times historic earnings, according to Mark Williamson at KBC Peel Hunt.
This is a transformational deal for Man that brings complimentary (SIC) expertise to the Group and importantly reduces its dependence upon AHL which has long been seen as a weakness. However, Man is paying up for GLG and the consideration for the business is being paid in cash. Integration will be an issue and Man will have to work hard to win the hearts and minds of the Intellectual Capital within in GLG or it could run the risk of having acquired a very expensive brand. There is huge potential but also significant risk implicit in this dea,l but much of the risk is already discounted in Man’s valuation and on balance it seems appropriate to retain a Buy stance.
In other words, if Man doesn’t make this work, prepare for a large goodwill write off.
Update: 12.36 (GMT) JPMorgan observes:
The cash portion of the offer is to be satisfied from cash resources of Man Group, and will reduce the company’s estimated regulatory capital surplus from $1.5bn to $0.3bn.
What will the new hardnut FSA make of that?
While we can understand the company’s desire to diversify its business away from AHL (its core product) and while we are aware that the company has been discussing potential inorganic growth for some time, we are less than convinced that this acquisition will be well received by the market and Man’s shareholders.
Indeed not.
At pixel time shares in Man Group are down 14.8p at 206.7p.
Update II: 15.23 (BST). At last. We have found analyst with some positive things to say about the deal – Numis Securities.
We believe the headline statistics make the c.$1.6bn GLG acquisition seem expensive (6.8% FuM, 19.8x 09 EPS, 24.4x 10 consensus EPS, 14.3x 11 consensus EPS). However, if the company is able to achieve the ongoing $50m of cost synergies it has identified, we estimate this has value creation of $0.5bn (based on a DCF) and the company estimates $0.4bn (based on 10x PE). This results in an effective price paid of c.$1.2bn, and makes the valuation more neutral in our view (5.0% FuM, 14.8x 09 EPS, 18.3x 10 consensus EPS, 10.8x 11 consensus EPS). If the company is able to achieve any revenue synergies on top of this, then we believe the deal would look value accretive. Whilst the company presents a case for the existence of revenue synergies (e.g. stronger combined distribution), we remain unconvinced they will be material to numbers at this stage.
Quite right. Revenue synergies. Does anyone really believe in them?
Update III: 15.40 (BST) Lex doesn’t.
It is hard to put a finger on revenue synergies. But that is the main reason Man Group, the world’s biggest listed hedge fund, will spend $1.6bn to swallow GLG, its US listed peer. The deal will bump up its funds under management almost two-thirds to $63bn giving it scale and new products that Peter Clarke, Man’s chief executive, hopes to market throughout existing distribution networks particularly in Man’s strong Asian markets.
The main worry, though, is retaining key personnel. GLG’s top brass will have plenty of Man shares to keep them motivated, but it is at the more junior level that the risk lies. With a reduction in the relative impact of GLG’s traders and strategists on the combined business, some may look to move elsewhere. Mr Clarke will hope that now that they have more money to play with they will stay put.
Related links:
One giant leap for Man (Group) - FT Alphaville
Dividend overboard at Man Group? – FT Alphaville
Man hunt – FT Alphaville
Futures Funds Fall Most Since 1987 as AHL, Henry Miss Shifts – Long Room