ASSET MANAGEMENT SECTOR SAID RIPE FOR CONSOLIDATION

M& A may be inevitable in the Canadian asset management space, and there are a few players that could be primed for big deals.

The industry faces a range of challenges including competition from ETFs and Canadian banks, as well as equity fund outflows and regulatory changes.

That’s prompted Scott Chan at Canaccord Genuity to suggest that M& A should be at the top of asset management firms’ list, since the cost savings associated with consolidation could be an important driver of earnings, and help offset many top-line pressures.

“Against this backdrop, we believe companies have no choice but to review strategic options,” he said in a research note.

“Recently in Canada, M& A activities have been relatively quiet, while the pace of consolidation has picked up globally,” Chan said, highlighting Janus Capital Group’s merger with U.K.based Henderson Group, and Standard Life’s acquisition of Aberdeen Asset Management.

The analyst noted both deals generated positive stock reactions, particularly Henderson and Janus, which shot up 17 per cent and 12 per cent, respectively, after their tie-up was unveiled.

However, after the initial exuberance, all four of the stocks involved in these mergers have underperformed their benchmark indexes.

The analyst believes depressed valuations and the low Canadian dollar make it difficult for these companies to find accretive acquisitions. However, Chan did highlight several opportunities, including a potential merger between IGM and CIX. He also highlighted a possible tie-up between CI and Franklin Resources Inc.