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Shares soar as plan to create UK’s largest fund manager is unveiled

A Standard Life logo sits on a wall outside Standard Life House, the headquarters of Standard Life Plc, in Edinburgh, U.K., on Saturday, Aug. 9, 2014.
Simon Dawson | Bloomberg | Getty Images
A Standard Life logo sits on a wall outside Standard Life House, the headquarters of Standard Life Plc, in Edinburgh, U.K., on Saturday, Aug. 9, 2014.

Standard Life and Aberdeen Asset Management announced on Monday that they are set to join forces in an £11 billion ($13.5 billion) all-share deal to create the U.K.'s largest fund manager, in a bid to ward off rising pressures in an industry where the benefits of scale continue to mount.

The combined company will be the second-largest fund manager in Europe with around £660 billion of assets under management (AUM) and comes hot on the heels of the tie-up between the U.S.'s Janus Capital and the U.K.'s Henderson Group last October, which pooled $320 billion AUM. Industry consolidation is widely expected to continue with other managers, including emerging markets specialist Ashmore, sometimes suggested as potential takeover targets.

In research published during 2016, analysts at Goldman Sachs posited that the challenging operating environment facing the industry would be "likely to force asset managers to reevaluate inorganic growth options," either in pursuit of scale, improved distribution channels or product line-up optimization.

While the management teams expect the merger to generate pretax cost savings of around £200 million per year within three years of closing, at the expense of a one-off £320 million charge, the two chief executives were keen to drum home the message during the media call that this combination was also about revenue synergies.

strategic rationale that makes sense here

Aberdeen's chief executive Martin Gilbert decried as "grossly exaggerated" certain weekend press reports that suggested the firms' combined headcount of around 9,000, mostly based between Edinburgh and London but with smaller outposts in scores of countries globally, would be whittled down by up to 1,000 employees and instead played up the cost efficiencies resulting from technical and operating platform rationalization.

Investors reacted positively to the deal with shares in both companies opening higher in European morning trade. Standard Life shares shot up by more than 9 percent fresh out of the gates but had retreated slightly to closer to 6 percent by midday U.K. time. Meanwhile, Aberdeen shares fell back to just short of 5 percent higher from an initial move of close to 7 percent.

Given the strong strategic rationale, broad investor, management and analyst enthusiasm for the deal seems warranted.

Facing continued pressure from the ongoing industry-wide shift of assets from active into low-cost passive management, growing regulatory pressure on a global scale but also specifically within the U.K. where the national regulator is midway through an inquiry into profitability levels at fund managers, the two firms' move to unite has a sound defensive ring to it.

However, the management teams are also justified in pointing to the deal's offensive benefits such as the ability for both sides to leverage each other's distribution networks – this being a particular boon for Aberdeen investors given Standard Life's strong retail access channels – and create a more comprehensive product platform.

The announcement follows a detailed leak on Saturday and the subsequent joint confirmation of advanced talks rushed out by advisors later that day, with Standard Life chief executive officer Keith Skeoch telling reporters on a call shortly after the release of the news on Monday that serious talks have been underway since January.

The combined company will be two-thirds owned by Standard Life's shareholders, however, management positions would be more evenly split with Skeoch and his counterpart at Aberdeen jointly taking the helm.

City grandee Gerry Grimstone, Standard Life chairman for nearly a decade, will retain that position at the new company with Aberdeen's Simon Troughton assuming the deputy chairman role.

The combination has been organized as a scheme of arrangement, a type of structure that requires approval from 75 percent of those holding voting shares as opposed to the 50 percent threshold needed for a takeover offer. Generally, a scheme of arrangement is only pursued when the acquirer is confident of the support of a target's management and shareholders.

Aberdeen's two largest shareholders, Mitsubishi UFJ Trust and Banking Corporation, which owns around 17 percent and Lloyds Banking Group, which owns over 9 percent, have both given their non-binding support to the deal.