The Macquarie Group yesterday announced the acquisition of US-based asset management firm Delaware Investments for $428 million. Macquarie has earlier articulated a strategy of using M&A to consolidate its position in its core businesses, taking advantage of opportunities created by the financial crisis, and yesterday's deal fits squarely into this strategy.
Delaware had assets under management of $125 billion as of June 30 and will bring the Macquarie Group's AUM to over $300 billion. Macquarie Funds Group (MFG), the asset management arm of Macquarie, had around $67 billion of AUM as of July 31.
Macquarie Bank will provide funding for the deal, which is expected to close by the end of this calendar year. The acquisition cost of $428 million is payable in cash and subject to adjustment at closing based on the level of net assets. The price represents 0.3% of AUM. Specialists referred to the price as attractive, especially when viewed in light of the opportunity for margin expansion under the Macquarie ownership.
Macquarie Capital (USA) advised Macquarie on the deal with Weil, Gotshal & Manges providing legal counsel.
Delaware Investments is owned by Philadelphia-based Lincoln Financial Group. LFG had an AUM of $171 billion as of March 31 across a range of products, including annuities; insurance; retirement plans; and comprehensive financial planning and advisory services. LFG's performance has been under pressure in the wake of the financial crisis and it has been exploring asset disposals.
According to a transcript posted on seekingalpha, LFG said in its second-quarter earnings call on July 31 that Delaware had a quarter of positive net flows and that "each of Delaware's 11 largest mutual funds beat its Lipper [a producer of mutual fund performance data] peer group's average return over a one-year period".
In a written statement announcing the deal yesterday, LFG said that exiting Delaware would allow it to enhance focus on its core principal insurance and retirement businesses.
Goldman Sachs ran an auction for Delaware on behalf of LFG. Aberdeen Asset Management was also reported to be in the fray during the early stages, but in the end, the deal was done principal-to-principal between LFG and Macquarie, said sources.
Macquarie said in an Australian Securities Exchange (ASX) filing that the takeover will provide it with "broader access to the world's largest capital market".
The deal is in line with Macquarie's intent to develop a global asset management business and significantly strengthens the position of the Sydney-based firm in the US. Macquarie intends to help Delaware grow by providing funding to support Delaware's investment in operations and distribution, access for Delaware clients to new products such as real estate, global fixed income and alternatives, and access to Macquarie's global distribution network.
Macquarie and LFG have agreed a 10-year contract for Delaware to continue to manage LFG's general account insurance assets. Around 20% of Delaware's revenue is generated from Lincoln accounts, said sources. LFG can terminate the agreements by paying a termination fee of $84 million, with the fee declining pro rata over the ten-year term.
Delaware was founded in 1929 and is one of the oldest asset management firms in the United States. It is currently headquartered in Philadelphia with teams in San Francisco and Boston.
Macquarie said it does not intend to change Delaware's operating base or team. Delaware president Patrick Coyne will continue to run the business, reporting to Ben Bruck, an executive director of Macquarie Funds Group and head of Macquarie's affiliated managers division. Bruck will shortly relocate to Philadelphia.
"Delaware will form a key element of Macquarie Funds Group's offering to our clients globally and will significantly enhance our existing North American asset management activities," Shemara Wikramanayake, global head of MFG, said in the ASX filing.
Coyne said that Delaware and Macquarie are both committed to the institutional and retail asset management business, thus "Macquarie is the perfect partner for us".
Sources add that Delaware is a well-established, mainstream asset manager, mostly dealing in traditional investment products. Macquarie is well-entrenched in higher-margin products, thus the deal brings together players with complementary strengths.
The deal is a step change for MFG in many ways, suggested specialists. It trebles MFG's assets under management, with the majority of these assets, in value terms, now being sourced out of the US. MFG employs around 600 people across 19 locations globally. Delaware employs 580 people, meaning the number of staff at MFG almost doubles, again with a large number now based in the US.
While declaring Macquarie's results for the financial year ending March 31, 2009, group managing director and chief executive officer Nicholas Moore highlighted that Macquarie derived 40% of its operating income from businesses that the firm didn't even have in 2004, with some of the new businesses grown organically and others acquired. "All [Macquarie's] operating groups were looking to grow market share as competitors reduced their activities or exited businesses," Moore said at the time.
Macquarie Group's share price gained 2.5% on the ASX yesterday to close at A$45.61 ($37.72). LFG's shares were marginally up at $22.93 in early trading on the New York Stock Exchange Wednesday morning.
