When Standard Life and Aberdeen Asset Management announced their merger last year they made a virtue of the scale of the business and its opportunities for getting even bigger.
The £11 billion combine gave Scotland a fund manager to challenge the top players in Europe and ensured the Scottish financial services sector, still bearing the bruises of the banking crisis, retained a significant presence.
Even before the marriage was consummated there was (very) loose talk that the newly-combined Standard Life Aberdeen was in talks about buying Scottish Widows from Lloyds Banking Group.
The idea took a brief hold of the market’s attention, though the notion of SLA bulking up in life and pensions when it was quite clearly focused on expanding as an asset manager didn’t seem to add up. Standard Life chairman Sir Gerry Grimstone admitted as much during a media briefing before the deal with Aberdeen was formally approved by shareholders at the Edinburgh Assembly Rooms.
But behind the scenes there was always the issue of what Widows would make of seeing the funds it offloaded in a management partnership to Aberdeen now being handled by its biggest rival. In the small print was a clause enabling Widows to terminate the contracts in the event that Aberdeen was “subject to a change of control with a material competitor”.
The merger of Standard Life and Aberdeen is deemed to have created such a material competitor and questions have been raised about why the market was not more clearly warned of this at the time.
Talks have been under way for months to resolve this competition issue, but clearly broke down in recent weeks, leading to the announcement on Thursday that Widows would be withdrawing £109 billion of funds.
SLA attempted to put a gloss on the situation, stating that the funds represent just 5% of revenues. Added to that, it is relatively low margin pensions business and not run by the group’s star managers, including Devan Kaloo (emerging markets), Hugh Young (Asia Pacific), and Harry Nimmo (UK smaller companies) who will be unaffected by the decision.
Even so, this is hardly pocket money. SLA currently manages £646bn, so the Widows funds amount to nearly 17% of the total and losing it, to some extent, undermines the rationale for the merger.
This is the sort of outflow that won’t go unnoticed and SLA’s co-CEOs, Keith Skeoch and Martin Gilbert, admitted they were disappointed. Shareholders expressed their own dismay and at one point on Thursday the company lost 10% of its value. The shares were already 16% lower since the merger completed last August.
There’s also the £40m impairment charge that will hit the bottom line and must be set against the £200m annual cost savings the combined group aims to achieve.
This comes on the back of a continuing stream of outflows before and after the merger. Sources say a combined £10.2bn was pulled from Standard Life and Aberdeen in the first nine months of last year, including £1.4bn from Standard Life’s flagship Global Asset Return Strategies (GARS) by December.
The issue is bound to dominate next week’s results from SLA when questions may be raised on whether it could accelerate its exit from the life sector to focus on rebuilding its clearly wounded asset management business.
Lloyds has also created its own problem. Fund management is getting costlier to practise (thanks in part to the EU’s Mifid II directive) and achieving economies of scale, as Standard Life and Aberdeen set out to do, seems to be the only way to make any sort of return.
The bank now has to find a new home for £109bn which won’t be easy given the pressures on margins.
Analysts are now pondering whether a newly-capitalised Lloyds will reignite its own fund management business, an option that may be mentioned when it unveils a three-year strategy next week.
Alternatively, it might just be persuaded to stick with the devil it has just rejected and reopen talks with Messrs Skeoch and Gilbert in the hope of achieving a more workable solution. After all, both companies are weakened by the decision, one by losing business, the other by having to go house-hunting without much bargaining power.