The deal to merge Standard Life and Aberdeen Asset Management, announced last week, took many by surprise, but perhaps was not as unforeseen as first appears.
The active management sector has been under pressure for some time over the cost of fees and the resurgence of the passive sector, and the fund outflows from both Aberdeen and Standard Life meant that coming together offers diversification and an increase in scale for both participants.
The deal sees the two companies "merge", although many see it as an acquisition, given that Aberdeen shareholders will own one third of the group, with Standard Life shareholders owning two thirds; Standard Life is also twice the size of Aberdeen, with a market cap of £7.5bn before the deal was announced, against Aberdeen's £3.7bn.
The new group will, however, be run by the chief executives of both companies – Keith Skeoch and Martin Gilbert – and be headquartered in Scotland.
The rationale for the deal, according to the joint company statement, was to build a more diverse, larger asset manager committed to active fund management taking on some of the biggest brands in the world and, at £660bn of assets of under management, becoming the largest fund manager in the UK.
Many analysts considered the move to be "defensive", given the recent record of both fund houses. Aberdeen has suffered in recent years due to outflows from its emerging markets funds – on which there is a heavy emphasis – due to concerns about emerging markets economies in the past few years.
Meanwhile, Standard Life has heavily relied on Global Absolute Returns Strategies (Gars) – but it, too, has underperformed recently, also prompting some outflows.
Ashis Dash, associate director fixed income strategies of Morningstar, said: "We've seen in the past that Aberdeen has been trying to diversify, from emerging markets into fixed income. It made a bid for Pioneer Global Asset Management last year, and this is its 43rd deal.
He said: "Aberdeen came into existence with emerging markets capabilities. That has been a core strength for it, but its funds haven't been performing that well over the past couple of years. For Standard Life, it's a little different from what Aberdeen does. Over the last five or 10 years, it has Gars, which has been one of the big success stories. If you see them together, the key areas they're focusing on are complementary: Aberdeen doesn't have as developed products as SLI, and SLI does not have as big a presence in emerging markets."
While, on the positive side, merging the two businesses might be seen as a diversifying move for both, to make the deal work, according to analysts, there will have to be some cost savings.
The merger statement said it expected considerable cost savings to come from "synergies" where the companies overlap, including "efficiencies from simplifying and harmonising platforms (approximately 31 per cent of the identified synergies); eliminating overlap in distribution (approximately 16 per cent). Savings are expected in Standard Life's and Aberdeen's complementary distribution networks; rationalisation of central functions across the combined group (approximately 21 per cent of the identified synergies); from rationalising the property portfolio."
Mr Dash said: "What they need to do is generate operational efficiencies, which is what will be required from this merger. If they can cut costs on the operational side, and pass that on to end investors that will be good. It needs to come down to the end investor."
The question is whether this can work. Trevor Moss, senior analyst of Berenberg Bank, said: "This type of merger has a lot of additional risk – you don't always get the cost savings out. You've got overlap of IT platforms, and you've got to get rid of people. If you've got two offices in Hong Kong and you close one down, then you may lose good people. How would the IFAs feel about that, and will you suffer outflows? It's not a one-way street, you don't just stitch things together – it's not always when you put these things together you keep the best people.
"Standard Life was in the business of developing organically in the last three years. It spent time opening up offices all round the world. It was on a pretty focused strategy that was going to generate savings; it hasn't haven't given it time, and it has gone for the silver bullet. That's all well and good, but I would argue that all of these things could have been done over time, including reducing costs and getting a lean, mean fighting machine."
Of particular interest to financial advisers is access to retail funds, the platforms and the future of 1825. The consensus is that advisers using Standard Life's wrap and Elevate can expect to get access to Aberdeen's funds more cheaply. One flag raised is the future of Parmenion, the platform owned by Aberdeen. Standard Life is currently merging the much large Elevate with its own, even more substantial, platform. Will Parmenion be allowed to wither on the vine and disappear through lack of investment?
Mark Polson, principal of the lang cat, does not think so. He said: "I don't think Parmenion will be top of the list to muck around with. Parmenion is still pretty small and Standard Life has got plenty of work to do in terms of integrating Elevate.
"Parmenion does different things; you class it as a platform, but it's really not." The difference, he added, is that it is useful for discretionary fund managers selecting ready-made portfolios for clients rather than offering thousands of funds for an adviser to select from, and was therefore niche.
Mr Polson said: "It has completely different architecture [to Elevate and Standard life wrap] and I think they will still invest in it. The difference between maintaining a platform with the investment you need to do and adding new functionality is not that massive."
Another issue for financial advisers is the question of what happens to 1825, the new financial adviser division, which has been buying financial advisers firms at a rapid pace. Some industry bosses fear this may be left by the wayside, and not given any senior management attention, which has appeared to turn away from the life and savings side of the business.
Mr Moss is more positive. He said: "I don't think it's inevitable they will give up on their strategy in place. This is a merger between Standard Life Investments and Abderdeen Asset Management. I think they remain committed to the UK savings and pension space and building their financial advisory arm.
"Standard Life UK savings business has already gravitated to a fee business, there's no insurance business left in it; it's an asset gathering business, attempting to build up further in asset management."
Mr Polson said: "The whole Aberdeen merger is about creating a global asset manager that competes with very large players. It's very hard to be growing organically from £300bn to $1trn, and working with Ryder Cup sponsorship, it's upping its profile in the US." The big drive is the institutional market, he added.
"It is not yet going to be inside the top five or 10 in the US in terms of global asset management firm, but it won't be a million miles away."
Melanie Tringham is features editor of Financial Adviser
Key points
Standard Life and Aberdeen announced a merger at the beginning of last week.
The merger is intended to diversify the two businesses and add scale.
Aberdeen's Parmenion platform is likely to stay intact.
