Hedge fund firm Man Group PLC has agreed to buy rival GLG Partners for $1.6 billion as it seeks to boost flagging growth, while creating a new giant in an industry reshaping after the financial crisis.
The cash-and-shares deal creates the world's second-biggest hedge fund firm behind JP Morgan, based on Institutional Investor magazine's rankings, and dilutes Man's reliance on its flagship black box fund AHL which badly lagged rivals last year.
It also offers Man new impetus in the large and lucrative U.S. market and gives it access to the super-rich clients and sovereign wealth funds invested with GLG.
The acquisition is a landmark deal for Man Group Chief Executive Peter Clarke, the former finance director who took over from high-profile boss Stanley Fink three years ago, shortly before the onset of the credit crisis. While removing a major competitor, the deal boosts total assets to about $63 billion, although this is still below Man's pre-crisis levels.
This is the most significant move in alternative investment that we have seen, and will see for some time, Clarke told reporters.
Shares in Man Group fell as traders fretted about the price in a sector where M&A can be tough to pull off -- particularly with clients left skittish by events of the last two years.
At 1333 GMT (9:33 a.m. EDT), Man shares were down 7.9 percent at 204 pence, while the FTSE 100 was up 0.9 percent.
According to KBC Peel Hunt, Man is paying 19.8 times earnings for GLG. Man itself is on a p/e ratio of 12.7 times.
It does seem to be a fairly full price, said Sarah Ing of Singer Capital Markets. When you buy a people business... what you do with it afterwards is what counts.
GLG shareholders will get $4.50 per share and the lion's share of the premium attached to the offer. The price represents a premium of about 55 percent to GLG's closing price on Friday.
Man also announced it would halve its estimated dividend to 22 cents for the current financial year ending March 31 2011, although a Man spokesman said it may end up higher.
For GLG, which will remain in its Mayfair offices after the deal is completed in September, the deal provides access to Man's huge sales network and greater stability after a difficult credit crisis in which assets fell sharply.
Bigger is better for us, Pierre Lagrange, the long-haired Belgian star fund manager who founded GLG with Noam Gottesman in 1995, told Reuters. With co-CEO Emmanuel Roman, the trio will get $500 million in shares from the deal, which they have agreed not to sell for at least two years.
In 2007, they used a U.S. shell company to engineer a listing on Wall Street which valued the firm at $3.4 billion, according to Thomson Reuters data.
Man Group has been hit by poor performance of AHL, the computer-driven $21.1 billion fund named after 1980s founders Michael Adam, David Harding and Martin Lueck.
The trend-following fund's losses wiped out $1.2 billion from Man's assets during the fourth quarter of last year and AHL is still down 3.7 percent over the past year.
Clarke said AHL's underperformance had not one jot of influence over the decision to pursue a deal with GLG. Our investors are asking for a broader product offering.
Keith Baird, an analyst at Oriel Securities, said the deal brought a much-needed shake-up to the product mix.
It enables Man to diversify away from AHL, which is a strategic priority for them... It brings together Man's global distribution network with a much wider product range, he said.
Man has flagged a possible acquisition for some time, and industry watchers mooted a deal with a U.S. firm to boost Man's ambitions there. Clarke said London-based, but New-York-listed, GLG would still facilitate our access in North America.
GLG's Gottesman moved to New York last year as the firm sought to shift its focus toward giant U.S. institutional clients.
Man sees annual cost savings of $50 million and expects the deal to be earnings enhancing in the financial year ending 2012.
(Additional reporting by Cecilia Valente; Editing by Erica Billingham)