Franklin Resources, the parent company of the Franklin Templeton mutual funds family, has bought Baltimore-based investment company Legg Mason for $4.5 billion.
Franklin offered $23 in cash for each outstanding Legg Mason share, a 23-percent premium over the trading price on 14 February. Franklin also will take on Legg Mason’s $2 billion in debt.
After the sale was announced, Legg Mason’s stock price surged 23.6 percent and Franklin’s rose 5.1 percent.
The combination gives Franklin greater access to Legg Mason’s institutional investors and expertise in bond and real estate investing and leaves Franklin less reliant on individual investors.
Legg Mason’s future is now less cloudy. It has tried to cut costs and streamline some operations, but the nine investment management firms it owns, and which operate somewhat independently, have made it difficult to push through changes.
Franklin has agreed to pay those Legg affiliates about $350 million in stock and bonuses to remain aligned with the new entity.
Both companies are seeking to adapt to an investment climate in which active customers – those paying commissions to brokers who pick stocks for them – are dwindling. They’re being replaced by independent investors making their own choices and trading over digital platforms for a few dollars per trade; or passive investors putting their money in fee-free funds, especially exchange-traded funds.
The deal has been approved by the boards of both companies and is expected to be finalized before October.
Franklin has about $698 million under management; Legg Mason has $804 million.
In the same week, Morgan Stanley paid $13 billion to acquire E-Trade Financial Corp.
The purchase moves the old-line bank squarely into the business of dealing with ordinary people as well as its usual stock-in-trade of catering to wealthy individuals and institutional investors.
Morgan Stanley has more than 15,000 staffers managing individual accounts of millionaires.
Last year, the bank opened an online financial management platform for people of more modest means. E-Trade will combine with that service, swelling it to more than eight million users and more than $3 trillion in clients’ assets.
The deal brings Morgan Stanley into competition with low-cost, online brokerage firms where customers are flocking. E-Trade gains a safe haven; competition is forcing down commission rates and trading fees across the industry and low interest rates impinged on the money E-Trade was making by investing cash sitting in customers’ accounts.
TRENDPOST: The finance and investment industry has been roiled by clients’ eagerness to abandon paid advisory services and put their money with discount and fee-free brokers or “set and forget” funds. Investment firms also are uncertain about digital currencies’ future effects on their industry.
The global economic slowdown underway and a possible looming recession would worsen the plight of high-cost firms.
Look for additional mergers, takeovers, and consolidations among old-line brokerage houses as they seek to compete with online trading platforms.
