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

Investing

Scott Mlyn | CNBC

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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 offered $50 per share of Legg Mason in an all-cash transaction.

Baltimore-based Legg Mason, which manages $803.5 billion, operates nine investment managers that do business under separate brands.

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.

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 managing fees and 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.

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.

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

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