Markets

Franklin Resources to buy Legg Mason, forming $1.5 trillion asset manager

Key Points
  • Franklin Resources announces a deal to buy Legg Mason, a tie-up that could help each navigate a worldwide shift in investor preference away from active management.
  • Franklin said it agreed to acquire Legg Mason for $50 per share, or $4.5 billion, in an all-cash deal and that it would assume about $2 billion of debt.
  • The announced deal also answers months of speculation over Legg Mason's future after activist investor Trian Fund Management confirmed its stake last year.
The Legg Mason headquarters stands in Baltimore, Maryland.
Andrew Harrer | Bloomberg | Getty Images

Franklin Resources announced Tuesday a deal to buy rival asset manager Legg Mason, a tie-up that could help each navigate a worldwide shift in investor preference away from active money management.

Franklin said in a press release that it agreed to acquire Legg Mason for $50 per share, or $4.5 billion, in an all-cash deal and that it would assume about $2 billion of debt as part of the purchase. That price represents a 23% premium above where Legg Mason stock closed on Friday, around $40 per share./

The company expects its purchase of Legg Mason to add to per-share earnings as soon as fiscal 2021. Shares of Legg Mason soared 23% immediately after the opening bell following the announcement while Frankin stock jumped 12.6%.

"This is a landmark acquisition for our organization that unlocks substantial value and growth opportunities driven by greater scale, diversity and balance across investment strategies, distribution channels and geographies," said Greg Johnson, executive chairman of the Board of Franklin Resources.

Baltimore-based Legg Mason, which manages $803.5 billion, operates nine investment managers that do business under separate brands. The current transaction is devised to preserve the autonomy of Legg Mason's affiliates, Franklin said in its release.

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San Mateo, California-based Franklin, meanwhile, has $698 billion in assets and manages a host of equity and bond investments under the Franklin Templeton brand. The acquisition announced Tuesday would create one of the largest asset managers in the world with $1.5 trillion under management.

Many active asset managers like Legg Mason and Franklin Resources have struggled in recent years as low-cost, "passive" index funds and ETFs draw investors away from the classical investment model based on management fees and savvy stock picking.

At the beginning of the bull run, active managers had a nearly 3 to 1 advantage over passive in U.S. equity funds, according to Morningstar. But that gap began to narrow significantly in 2012 and has come down sharply since, with some research indicating that passive funds tracking indexes like the S&P 500 now control more than half of the U.S. stock market.

That transition away from active managers has kept profits under pressure at firms like Legg Mason and Franklin, forcing many in the industry to scramble to find new sources of revenue and slash costs.

"Our complementary strengths will enhance our strategic positioning and long-term growth potential, while also delivering on our goal of creating a more balanced and diversified organization that is competitively positioned to serve more clients in more places," Johnson said of the deal.

Nelson Peltz speaking at the 2019 Delivering Alpha conference in New York on Sept. 19, 2019.
Adam Jeffery | CNBC

The announced deal also answers months of speculation over Legg Mason's future after activist investor Trian Fund Management confirmed its second stake in the company.

When the activist investor confirmed its second stake in Legg Mason in May 2019, Trian CEO Nelson Peltz noted that his top priorities for the manager were cost reduction, organic and acquisition-based revenue growth and profitability. Both he and longtime lieutenant Ed Garden sit on Legg Mason's board.

Peltz voiced his support of the deal in Franklin's Tuesday press release.

"Given the dynamics of today's rapidly evolving and increasingly competitive asset management sector, I believe this transaction is compelling. In our view, it offers an attractive valuation for Legg Mason's shareholders," he said.

"I believe it will also enable Legg Mason's investment affiliates to remain at the forefront of an industry where scale is increasingly vital to success and to join Franklin Templeton," Peltz added.

Trian owned 4.47% of Legg Mason equity at the end of 2019. Prior to its current stake, Trian owned Legg Mason stock from 2009 to 2016; Peltz sat on the board through 2014 before stepping down.