By Carolyn Cohn and Trevor Hunnicutt
LONDON/SAN FRANCISCO (Reuters) - London-based asset manager Henderson Group (L:HGGH) agreed to buy U.S. rival Janus Capital Group Inc (N:JNS) on Monday in an all-share $6 billion deal to cut costs and boost profits amid growing competition from index funds run by top providers such as Vanguard Group.
The combined company, Janus Henderson Global Investors, will manage $320 billion in assets, potentially making it the 39th largest asset manager, globally. Henderson Chief Executive Andrew Formica and Janus CEO Dick Weil will be co-chiefs of the London-headquartered company.
If Formica and Weil can tame an operation that will span Denver, London and Japan, their new heft could help thwart expanding regulatory scrutiny on the industry and a move toward low-cost passive investing, analysts said.
Shares of both companies surged as they said the deal would boost earnings by more than 10 percent, showing that investors saw the move as a viable alternative to other strategies to defend against passive rivals, such as hiring star managers.
While the merger appeased markets, the combined company will also need to keep major clients and top employees, such as portfolio managers, happy, said T. Neil Bathon, managing partner at asset management consultancy FUSE Research Network LLC.
Henderson shares closed 17 percent higher, while Janus shares were last up 13 percent on the New York Stock Exchange.
"We see this as a positive move with complementary asset bases and a very material cost synergy figure," analyst Paul McGinnis at Shore Capital said in a client note.
MERGER SPECULATION
Analysts expect the deal to kick off talk of mergers elsewhere in the industry with companies such as London-based Jupiter (L:JUP) seen as possible targets. Jupiter, whose shares rose 6 percent, did not respond to a request for comment.
The merger comes as some mid-sized players in the industry look to gain global scale, streamline operations and diversify in order to protect profits as clients push fees down and regulators ramp up scrutiny of fund managers' practices.
Steven Miyao, a president at consultancy DST kasina, said that with half of the top 100 asset managers seeing withdrawals since 2014, the strategic value of a merger today is higher than it will be in the future.
"The combined product line-up will be much more balanced and diverse," Formica told a media call, adding Henderson had strength in British and European markets while Janus, which hired Pacific Investment Management Co co-founder Bill Gross as fund manager in 2014, was strong in the United States and Japan.
In a statement on Monday, Gross touted the "greater global scale" of the combined firms.
Janus, which drew acclaim for its U.S. stock funds during the 1990s tech boom, stumbled in the years after. Weil joined in 2010 and despite moves including hiring Gross and buying exchange-traded funds business VelocityShares in 2014, investors pulled $2.2 billion from their funds this year, through August. Henderson posted withdrawals of $1.6 billion over the same timeframe, according to researcher Morningstar Inc (O:MORN).
Henderson and Janus shareholders are expected to own approximately 57 percent and 43 percent, respectively, of Janus Henderson Global Investors' shares, with the merger completing in the second quarter of 2017, subject to regulatory approvals.
The merger will involve a share exchange in which each Janus share will be exchanged for 4.719 newly issued shares in Henderson, the firms said in a statement.
Analysts said the success of the leadership will depend on Formica and Weil working well together.
"It can be a disaster if it's the wrong people, if they don't communicate," said Miyao.
The firms said they were targeting annual cost savings of at least $110 million, which Henderson chief financial officer Roger Thompson told the media call represented around 10 percent of the combined group's cost base. Cost savings would focus on overlapping functions and areas such as offices and IT, Thompson added.
Janus' largest shareholder, Dai-ichi Life (T:8750), supports the deal, the firms said.
The combined company will apply for a primary listing in New York, keeping Henderson's Australian listing but delisting in London.
Talks on the merger began at the beginning of the year and were not impacted by the Brexit vote, Formica said.