Activist investors like shaking companies up and putting management in the hot seat. That might not be the message that that they would like to send out, but that is what they do. When news that activist investment fund Trian Fund Management under Nelson Peltz took stakes in Invesco Ltd. (NYSE: IVZ) and Janus Henderson Group plc (NYSE: JHG), it is not that surprising that the stocks rose on the news. Perhaps the main issue is “Why.”
Janus Henderson Group was up big on Friday and the shares were up again on Monday as the market is evaluating what Nelson Peltz and his Trian activist group might be interested in. The stock was at $21.60 ahead of the news, and the share price late on Monday was $25.50 for a total continued move of 18%. Invesco’s gain of almost 1% to $11.93 on Monday was still up 6% from last Thursday’s close of $11.25.
As of October 1, 2020, Trian’s move into Invesco was a total of 36,739,343 shares worth some $394.5 million after commissions. One of Trian’s affiliates beneficially owned an additional 8,718,084 shares which were said to be acquired through a series of privately negotiated back-to-back call and put option transactions with an aggregate strike price of just over $99 million.
While the SEC filing indicated that Trian believes that Invesco’s shares are undervalued and represent an attractive investment opportunity, as well as that they may seek to acquire additional securities, this was the main strategy that comes into play. That was noted as mergers, acquisitions, consolidations or other extraordinary corporate transactions with one or more companies in the asset management industry. Trian also indicated that Trian has met with Invesco’s management and intends to keep engaging with management.
Another SEC filing last week showed that Trian beneficially owned more than 18.06 million shares of Janus Henderson for a purchase price of more than $387.5 million after commissions. The note was effectively the same here with a similar note that the asset management industry is undergoing significant change and efforts such as mergers, acquisitions, consolidations or other extraordinary corporate transactions would lead to higher values.
With management at Janus Henderson and Invesco having both been in communications with Trian, the combined companies would have a current value of just over $10 billion. Janus Henderson is now worth $4.67 billion and Invesco is worth about $5.45 billion. Invesco also has a 5.2% dividend yield, and Janus Henderson has closer to a 6.6% yield. Both dividends are high in part due to weakening shares over time.
What investors would be working into at the current time is what the pro forma combined company might look like. There are obviously many cost synergies that Trian believes can be backed out of the business via consolidation. The effort gets complicated when it comes to evaluating the massive number of offices that the companies have. The Janus U.S. team already merged with U.K.-based Henderson. Invesco manages about $1.1 trillion in assets and Janus manages close to $300 billion.
This is also not a unique transaction or first rodeo for Trian. On top of reports of a recent fund targeting consolidation, Nelson Peltz had already invested into Legg Mason and took a board seat in recent years. Franklin Resources Inc. (NYSE: BEN) eventually acquired Legg Mason for about $4.5 billion in total deal costs. That effort was shown to have generated a return of more than 50% for Peltz and Trian and was promised to show $200 million in cost savings.
The investment management industry has been experiencing a major transformation in recent years. The trend has been toward lower profitability and lower margins, even if assets have grown at some firms. There is a zero interest rate policy impacting margins, and the secular move away from mutual funds into exchange-traded funds has continued to generally bite into management fees.
Invesco and Janus Henderson are also both trading at very low valuations. Shares of Janus Henderson are valued at barely 10-times expected earnings and that’s after the recent 18% gain. Invesco’s valuation is only valued at about 5 times 2019 earnings and about 7.5 times expected earnings. The asset management sector within banks and financials tends to have low valuations, but this is low even by those standards.
Without knowing how many offices could be consolidated and without knowing how many employees could be moved out of the combined operations, it does not seem unreasonable to believe that operating expenses could be trimmed by 10%. Invesco’s operating expenses came to $2.92 billion in 2019, and Janus Henderson counted $865 million in operating expenses in 2019.
Where the potential merger becomes interesting is that the move higher for Janus Henderson has moved its own stock up above the $22.99 consensus analyst price target from Refinitiv. Invesco’s stock is also now above its $10.43 consensus analyst target price, but both UBS and Barclays have $11 price targets on Invesco.