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Morningstar | Rumors About Invesco Buying Oppenheimer Fits Our Long-Term Thesis on Scale-Driven Consolidation

We're not sure what to make of the rumor that emerged late this week that narrow-moat Invesco is looking to buy OppenheimerFunds. On the one hand, it fits with our long-term consolidation thesis for the U.S.-based asset managers, which sees mid-tier asset managers (those with $250 billion-$750 billion in AUM) acquiring small- to mid-size firms (those with $25 billion-$250 billion in AUM) in order to increase their scale and offset the fee compression and expense pressures we see impacting the industry over the next five to 10 years. At the end of August 2018, Invesco had $988 billion in AUM, while Oppenheimer had an estimated $248 billion in managed assets. An acquisition of Oppenheimer would increase Invesco's AUM by 25%, so additive to scale, but would also increase its exposure to active equities and the retail channel, the two areas of the market we expect to be pressured more by an increased focus on fees and investment performance in the near to medium term.

Bulking up on AUM in areas where both firms are feeling the greatest amount of fee and expense pressure should allow Invesco and Oppenheimer to consolidate efforts and keep their operating margins from getting hit too hard, and potentially improve overall product performance. That said, with both firms being viewed as average when it comes to performance and product offering (with Oppenheimer's global and international equity fund platform being the exception), we'd view this as more of a scale move (if the rumor proves to be true). But with a supposed price tag of $5 billion (equivalent to 2% of AUM and just under 13 times our estimate of Oppenheimer's EBITDA), this seems to be a high price to pay for a scale-driven deal, especially since Invesco has already spent $1.5 billion during the past year rolling up Source's and Guggenheim's ETF operations. We're leaving our moat rating and $35 per share fair value estimate in place until we have more concrete details that a deal is actually in the works.