Did Franklin Templeton Waste Shareholder Money on Legg Mason?

Posted on 04/16/2020

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The U.S. Federal Trade Commission has approved Franklin Resources’ (of Franklin Templeton Investments) takeover bid of Legg Mason for US$ 50 a share, or US$ 4.5 billion total. Franklin Resources now has to seek SEC approval. Both companies actively manage portfolios on behalf of clients. Franklin is planning to gain more institutional clients through the acquisition. The latest numbers from February indicate that Franklin had US$ 657 billion under management and Legg Mason had US$ 789 billion. Franklin will take on US$ 2 billion in debt. Gaining clients in the active asset management industry has been more challenging given the interest in passive index funds with lower management fees.

Executive Chairman of Franklin Resources Greg Johnson wrote that the acquisition “unlocks substantial value.” President and CEO Jenny Johnson wrote it would help Franklin Resources through “world-class affiliates, investment teams and distribution channels, bringing notable added leadership and strength.” Carol Davidson, Legg Mason’s Lead Independent Director suggested the deal would help “Our investment affiliates and valued clients, who will benefit from a leading global asset manager with the scale to compete and win in today’s markets.”

Legg Mason operates ETFs that involve management expertise such as the “Small-cap Quality Value” and “International Low Volatility High Dividend” funds. Legg Mason’s International Low Volatility High Dividend fund has taken an abrupt drop due to the selloff in financial markets and its large holdings in stocks that had already been declining such as Softbank and Japan Tobacco. The ETF is essentially flat since inception in July of 2016. Legg Mason has been an asset management in trouble for quite some time, as the company went through multiple iterations of internal restructuring, along with a slate of portfolio managers that consistently underperform benchmarks, thus impacting the attraction of investors. Legg Mason has tangoed with activist Nelson Peltz in a bid where Trian Fund Management has tried to turn around the multi-asset manager company. Trian Fund Management owned 4.47% of Legg Mason equity at the end of 2019 in which Nelson Peltz supports the takeover of Legg Mason.

In September of 2019 Legg Mason put out a market snapshot entitled “Why the Expansion Can Continue.” Legg Mason quoted Michael Buchanan and Robert Abad of Western Asset Management who thought in general, “We are optimistic that resilient global growth, low inflation, central bank activism and stable credit fundamentals will likely continue to extend the life of this global credit cycle.” The inverted yield curve was not a factor for Chuck Royce and Francis Gannon of Royce & Associates who opined, “It could be different this time” based on easy money, little apparent inflation, and low interest rates. This was in contrast to other managers, such as John Hussman who wrote at the time: “The idea that “low interest rates justify high stock valuations” is really a statement that “low interest rates justify low expected stock returns as well.” Those high stock valuations are still associated with low prospective future stock market returns. Worse, the notion that “low interest rates justify high stock valuations” assumes that the growth rate of future cash flows is held constant, at historically normal levels.”

LEGG MASON, INC. AND SUBSIDIARIES
Amounts in USD – billions

Keywords: Franklin Resources Inc.

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