Invesco's Morgan Stanley deal raises questions

MORNINGSTAR VIEW: The acquisition of Morgan Stanley's retail fund ops could up our fair value but we have reservations about the size and timing of the deal

Greggory Warren, CFA 21 October, 2009 | 2:43PM

Analyst Note
We're placing Invesco under review while we assess the full impact of the firm's acquisition of Morgan Stanley's retail fund operations, which include the Van Kampen family of funds. At first glance, the deal, which will add $119 billion to Invesco's assets under management (AUM), could increase our fair value estimate for the firm by as much as $2 per share. This is based on the $1.5 billion deal price ($1.0 billion of equity and $500 million in cash), integration costs of $100 million-$125 million, and synergies of around $70 million. While Invesco expects the deal to be accretive in the first full year after it closes in mid-2010, we continue to have reservations about the firm doing a deal of this size right now. With its poor record of integrating past acquisitions, which has kept the firm from reaping the full benefits of the size and scale of its operations and left its operating margins well below its peers, we'd much rather see Invesco working on putting its own house in order rather than making such a major acquisition.

The terms of the deal satisfy Morgan Stanley's desire to have an equity stake in whatever organisation acquires its retail fund operations. While it is a smaller stake (9.4% of Invesco's current shares outstanding), given the amount of cash Invesco has on hand, which was enhanced by a $400 million secondary offering in May, we believe it is likely that Morgan Stanley's stake could rise over time as Invesco uses some of its excess cash to repurchase shares.

As for the impact that the acquisition will have on Invesco's AUM, the company's asset mix will change very little, although it will end up with a higher level of retail investors and clients domiciled in the United States. As of September 30, Invesco had $417 billion in AUM, made up of equity (39%), balanced (10%), fixed-income (18%), and money market (23%) funds. The combined firms will derive 41% of their AUM from equity, 10% from balanced strategies, 18% from fixed income, and 17% from cash management. With retail exposure rising from 47% of AUM for Invesco to 57% for the combined firms, and the company increasing its reliance on US-domiciled clients (which rise from 61% of AUM to 67%), we expect Invesco to lose some of the diversification it has had in its managed assets.

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About Author

Greggory Warren, CFA  Greggory Warren, CFA, is a senior stock analyst with Morningstar.

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