EUR 850.00 For Business Accounts Only

Morningstar | Equity and fixed-income outflows will negatively affect Federated's 2018 results.

Federated's purchase of a 60% stake in Hermes has raised some questions about what the deal means not only for the two firms involved but the future of active managers in a world beset by the growth of passive investments and increased regulatory scrutiny. While there are several reasons to like the combination strategically, with increased scale and diversification being top of mind, the merger does little to abate the challenges the two asset managers face in their core markets. Federated still needs to figure out how to best navigate the headwinds created by the Department of Labor's fiduciary rule in the U.S., while Hermes is dealing with additional layers of regulation in European markets, which Brexit is likely to make even more complicated.We're generally not big fans of mergers and acquisitions in the asset-management industry, with most deals failing to live up to expectations because of culture clashes and an inability to deliver on revenue and cost synergies. That said, we expect to see a greater level of consolidation as firms look to scale up their businesses to offset the fee and margin pressures created by regulatory actions and the growth of low-cost passive products. We view Federated's stake in Hermes as one of the earlier moves in this coming consolidation cycle and credit the management teams for finding what looks to be a good fit for their businesses longer term.Federated will have a larger counterweight to its cash management operations (which accounted for 67% of AUM and 39% of revenue during the first half of 2018), and will firmly expand its reach outside of the U.S. We expect there to be some growth opportunities, with each firm able to sell products in markets that may have been difficult for them to penetrate before the deal. That said, the price tag--12.8 times 2017 EBITDA--was rich by our standards, even with the lucrative environmental social governance business Hermes brings to the table. With lower base management fees, a greater dependence on performance fees, and lower profit margins than Federated has been generating (with a lack of meaningful synergies), it's difficult for us to get excited about the deal.