Putnam eyes deals after merger talks with American Century break down

Analysts say Barings, Ivy Investments, could be potential targets for Putnam if American Century deal doesn’t come back to the table

Putnam Investments’ owners held unsuccessful talks over the summer to merge the fund group with the similarly-sized American Century Investments, Fund Intelligence understands.

The revelation follows Paul Mahon, the CEO of Putnam’s parent company Great-West LifeCo, making clear on a recent earnings call that it was prioritizing deals for the $174bn asset manager and the $653bn recordkeeper Empower Retirement.

“We kind of have a two-pronged approach at Putnam,” Mahon said on a Nov. 2 third quarter earnings call. “One is to drive out efficiencies to continue to drive our strong performance so that we can improve the margins we’ve got organically. But we still believe than an acquisition to provide some step rate scale will really unlock more value.”

Putnam was close to reaching a merger agreement with the $170bn American Century this summer — a deal that would have been compared to Invesco’s acquisition of OppenheimerFunds if it hadn’t fallen apart, sources familiar with the matter told Fund Intelligence.

Representatives of Putnam and American Century declined to comment on the purported merger.

“Great-West has a lot of dry powder and could do a big acquisition,” Scott Chan, managing director, research-financials, at Canaccord Genuity, told Fund Intelligence. “A merger with American Century would have made sense, as Mahon has said for two years now that the firm is looking to add scale on the US asset management side.”

Investors are less keen on seeing Empower make deals as it already has significant scale, the analyst added. Empower had thrown its hat in the ring for Wells Fargo’s recordkeeping division, which Principal Financial Group snagged earlier this year.

Any merger with American Century could have fallen apart due to valuation and market conditions, Chan said. Investors should not rule out the possibility of the deal going back on the table in the future, he added, as American Century has a unique value proposition in terms of ownership and product mix.

American Century’s primary owner is Stowers Institute of Medical Research, which is a nonprofit biomedical research organization. Japan-based Nomura Holdings has a minority stake in the firm, which it bought from Toronto-based bank CIBC in 2015.

If the deal had gone through, its highly likely that American Century would have made a push to steer the ship because of its “creative and forward-thinking process,” a source familiar with the firm told Fund Intelligence.

American Century recently launched a new factor-investing brand, called Avantis Investors, for which it poached a slate of executives from Dimensional Fund Advisors. American Century is also expected to be the first firm out of the gate with nontransparent ETFs employing Precidian Investment’s ActiveShares structure, according to Precidian CEO Dan McCabe.

Putnam has no ETF footprint. It offers mutual funds in equities, fixed income and alternatives asset classes.

The fund group plans to enter the model portfolio space later this year with four multi-asset offerings.

Putnam posted $9m in profit in Q3, up from $6m in the previous quarter and net loss of $1m in Q3 2018. It attributed the numbers to an increase in performance fees and a reduction in expenses since the firm moved into its new headquarters.

Expenses at Putnam also fell due to the firm’s cost reduction initiative that has been underway for more than a year, Mahon told investors. Headcount reductions due to fund consolidation and automation also drove Putnam’s numbers higher, he added.

Executives did not elaborate on how many jobs were cut during the quarter, adding that the cuts were not responsible for significant cost savings.

Other potential acquisition targets for Putnam include Waddell & Reed Financial’s Ivy Investments and MassMutual’s Barings, Darlene DeRemer, a partner at Grail Partners, told Fund Intelligence.

Waddell has been prioritizing its eponymous wealth management business and attempting to carve a niche from it separate from its asset management business that has seen outflows for several quarters. The firm could consider incremental acquisitions in asset classes or niches it doesn’t have a presence in, executives previously said, adding that the firm has over $200m for product incubation and development efforts.

However, a deal with Barings could bring Putnam international equities offerings and institutional distribution, both of which it currently lacks, DeRemer said. Barings and Putnam could have a cultural overlap, as they’re both owned by insurance companies, she added.