Abrdn banks on £1.5bn ‘no brainer’ acquisition of Interactive Investor

Etched into a glass window fronting the Edinburgh headquarters of the company formerly known as Standard Life Aberdeen is a single word: Abrdn.

When the 197-year-old company decided to reinvent itself by ditching vowels in 2021, the move was met with widespread derision. But according to chief executive Stephen Bird, this was a provocative plan to modernise a company that has struggled to find its footing nearly five years after a lacklustre merger.

“We fully expected to get it,” Bird, who has been in the post since September 2020, told the Financial Times. “Good brands get noticed. Great brands begin a conversation.”

Reviving the performance of one of the UK’s largest asset managers will take more than losing letters, however. Bird’s decision in December to buy retail investment platform Interactive Investor for £1.49bn in cash is his biggest bet yet. The deal is expected to complete in the second quarter of 2022 and still needs to be voted through by Abrdn’s shareholders.

Abrdn’s leadership believes Interactive Investor, the UK’s second-largest funds supermarket with just under £55bn in assets under administration, is the key to building a third leg in a lucrative segment that will secure the struggling manager’s future.

Bird and Sir Douglas Flint, Abrdn’s chair, envision creating an investment group that can service a wider pool of clients throughout their financial lives, rather than continuing to focus on its well-established wealth management and institutional businesses.

“The II deal is completely central to the survival of the CEO and the chair,” one analyst said. “They’re burning through a huge amount of capital . . .[when] what’s already there is subscale. They need to demonstrate that they need these three separate business lines, and I’m not convinced that this is the case.”

After Standard Life and Aberdeen Asset Management merged in 2017, their combined market cap was more than £11bn. Today, it is £5.3bn. Valuable stakes in two joint ventures in India, which Abrdn is gradually selling down, are at present valued at about £1.4bn. A stake in Phoenix, the UK insurer and Abrdn’s biggest client, is worth an estimated £900m. Abrdn announced on Thursday that it would also reduce its Phoenix stake from 14.4 to 10.4 per cent.

Abrdn, which manages £532bn, has suffered net outflows every year since 2016. Lloyds Banking Group in 2018 yanked a mandate to manage £109bn for the bank’s Scottish Widows insurance business, then the asset manager’s biggest client, over objections to the merger.

The tie-up created duplications and a confusing corporate structure, exacerbated by subsequent acquisitions.

Former co-chiefs Martin Gilbert and Keith Skeoch have now departed from executive roles, as have many senior leaders and some star managers, while former cash cow funds have fallen flat.

Gilbert, co-founder and chief executive of Aberdeen from 1983 to 2019 and one of the architects of the 2017 deal, acknowledged it “has not gone as well as I hoped it would”.

“I think people underestimate the technology side [of mergers] across geographies and platforms,” he said. “The front office is pretty easy, fund managers are easy to integrate but the technology is hard and time-consuming.”

Retail is one of the hottest segments of the investment market as workplace pension schemes become less generous and traditional managers are sucked into a price war to compete with passive giants such as BlackRock and Vanguard.

Richard Wilson, Interactive Investor’s chief executive who has pledged to stay on after the deal closes, said the fact that the platform will operate as a standalone unit reduces the risks of failure. “All the cliff-edge risk in terms of cultural merger and system merger, that’s just not part of the mix,” he said.

The two companies have pledged that Interactive Investor will still offer its customers a full range of funds and will not favour Abrdn’s offerings over rivals.

But critics say the price tag for Interactive Investor is hefty for a business where the synergies are unclear and the opportunities to cross-sell products are limited.

“We don’t really understand the II deal. Are they trying to turn the business into a wealth manager? Is it going to work?” asked a top 10 investor in Abrdn. “The acquisition is quite expensive for what it is. Markets don’t believe the targets they’ve set.”

Gilbert, who remains a shareholder, is more positive. “I’m more a value player, I’m not sure I would have been brave enough to buy [Interactive Investor] because of its valuation, but I think it’s a good deal and an engine for growth.”

Abrdn does see an opportunity to sell its wealth management services — such as financial advice and estate planning — to Interactive Investor’s pool of 400,000 customers.

“We need to earn the right to be on any platform, including one that we own,” said Flint. “The advantage is the feedback loop that you get as to what investment themes are very attractive.”

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Bird also defended the deal price. Buying Interactive Investor rather than letting it list was a “no brainer”, he said. “If we had let it go to IPO, and then made a bid for it, we would have had to pay a 30 to 35 per cent premium over the listed price.”

Bird said he would look to make other acquisitions as “add-on” purchases, but nothing on the same scale.

The company took a majority stake in real estate logistics manager Tritax in 2020.

Bird said: “We will be in a position to give capital back . . . one way will be through a progressive dividend policy but we’re also open to other ways of doing so.”

Since arriving at Abrdn, Bird — who formerly led Citigroup’s consumer banking and Asia-Pacific businesses but does not have a background in fund management — has cut the company’s dividend and sold or closed a number of secondary businesses in Nordic countries and Indonesia.

The company reported a 77.2 per cent rise in adjusted pre-tax profits in the first half of 2021 to £113m, compared with a £498m loss in the same period a year earlier.

“You would never expect us to have solved the market cap problem in 12 months, but you would expect us to take the actions that set the business up for sustainable growth,” he said.

Flint first broached the idea of Bird joining Abrdn over pints of Scottish beer and fish and chips at an Edinburgh pub in February 2020. The two had first come across each other while working in Asia, when Bird was still at Citi and Flint was chair of HSBC.

Bringing in a chief executive who did not have a background in asset management surprised many. But Bird says it is time to transform Abrdn from a fund manager into a one-stop shop for all investor needs.

“There are cynics that are dyed in the wool asset management, and they’re like: we only look at you as an asset manager. If we only looked at ourselves [that way], we wouldn’t be forging a path into the future,” he said.

Additional reporting by Harriet Agnew