A merger of different equals

The stock in focus this month is Janus Henderson Group (JHG). Here, we take a look at how this merger complemented both businesses to create an even greater whole.

Two main pathways for growth are organic growth – essentially where a company grows its existing business, and acquired growth – where they purchase another company to expand earnings.

With the latter, two aspects that investors should look for when it comes to acquisitions are:

1. Synergies – How the newly acquired businesses fit into the structure of the existing business, and

2. Savings – Opportunities to achieve cost outs for the larger group through efficiencies, leading to a bigger bottom line.

Henderson Group’s recent merger with Janus Capital looks to achieve a number of improvements in both these areas. Henderson Group was an international fund manager based in the UK, but their business was dominated by equities and property funds, and largely based in the UK and Europe with limited exposure to the massive US bond markets. While possessing a very good track record in both distribution and performance, the company was struggling to penetrate the US market. Additionally, the dangers of being less regionally diversified was evident during the Brexit event, where UK fund managers suffered big outflows prompted from investors fleeing that particular market in a period of uncertainty.

By contrast, Janus Capital was a US based fund manager with a heavy focus on bonds and fixed income, heavily skewed towards the US and Japanese markets. They had experienced some ongoing performance issues, particularly within their quantitative products, and were starting to experience net outflows.

The strategy behind the merger

Rather than pursue purely organic growth options, on 3 October 2016, the two companies announced a merger to combine their strengths and complement each other in areas they were lacking, to create a truly global asset manager with a diverse geographic footprint. On top of these benefits, the company has identified at least $US110m in expected annual cost reductions, as a result of synergies which will flow directly to the bottom line for investors.

The addition of shared expertise and expanded cross-border distribution opportunities is expected to deliver double digit earnings per share growth out to 2019. While initially well-received by investors, lingering negative sentiment from the Brexit talks has meant that the full value of the benefits of the merger are yet to be reflected in the share price. However, it’s likely that as these benefits are reflected in earnings, investors should enjoy a period of positive returns.

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