Deals and People February 18, 2020

Franklin Templeton Acquires Legg Mason

The combined platform creates a strong separately managed account business, and the company plans to expand its multi-asset solutions.

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Franklin Resources Inc., a global investment management organization operating as Franklin Templeton, has entered into a definitive agreement to acquire Legg Mason Inc. for $50 per share of common stock in an all-cash transaction. The company will also assume approximately $2 billion of Legg Mason’s outstanding debt.

The acquisition of Legg Mason and its multiple investment affiliates, which collectively manage more than $806 billion in assets as of January 31, will establish Franklin Templeton as one of the world’s largest independent, specialized global investment managers with a combined $1.5 trillion in assets under management (AUM) across one of the broadest ranges of investment teams in the industry. The combined footprint of the organization will significantly deepen Franklin Templeton’s presence in key geographies and create an expansive investment platform that is well balanced between institutional and retail client AUM.

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In addition, the combined platform creates a strong separately managed account business.

“This is a landmark acquisition for our organization that unlocks substantial value and growth opportunities driven by greater scale, diversity and balance across investment strategies, distribution channels and geographies,” says Greg Johnson, executive chairman of the board of Franklin Resources Inc. “Our complementary strengths will enhance our strategic positioning and long-term growth potential, while also delivering on our goal of creating a more balanced and diversified organization that is competitively positioned to serve more clients in more places.”

Jenny Johnson, president and CEO of Franklin Templeton, says, “This acquisition will add differentiated capabilities to our existing investment strategies with modest overlap across multiple world-class affiliates, investment teams and distribution channels, bringing notable added leadership and strength in core fixed income, active equities and alternatives. We will also expand our multi-asset solutions, a key growth area for the firm amid increasing client demand for comprehensive, outcome-oriented investment solutions.”

During a conference call, Jenny Johnson said Franklin Templeton spent a significant amount of time reviewing its options and determined Legg Mason was the best fit for its strategic plan. The company has been working with Legg Mason on the agreement for several months. It is part of a multiyear strategic plan for which Franklin Templeton identified key growth initiatives.

She added that the transaction brings together two especially complementary platforms. “We realized multiple strategic objectives in one transaction—acquiring several companies as well as a holding company,” Johnson said.

Joseph A. Sullivan, chairman and CEO of Legg Mason, says, “The incredibly strong fit between our two organizations gives me the utmost confidence that this transaction will create meaningful long-term benefits for our clients and provide our shareholders with a compelling valuation for their investment. By preserving the autonomy of each investment organization, the combination of Legg Mason and Franklin Templeton will quickly leverage our collective strengths, while minimizing the risk of disruption. Our clients will benefit from a shared vision, strong client-focused cultures, distinct investment capabilities and a broad distribution footprint in this powerful combination.”

With this acquisition, Franklin Templeton will preserve the autonomy of Legg Mason’s affiliates, ensuring that their investment philosophies, processes and brands remain unchanged. The company says it has spent significant time with the affiliates and there is strong alignment among all parties in this transaction and shared excitement about the future of the company.

For example, Terrence J. Murphy, CEO of ClearBridge Investments, a Legg Mason affiliate, says, “As part of Franklin Templeton, we are confident that we will retain the strong culture that has defined our success as a recognized market leader in active equities. Their commitment to investment autonomy, augmented by the scale and reach that the combined organization will provide, will allow us to deliver for our existing clients and expand our ability to deliver our investment capabilities in new channels and regions. We are very pleased to join the team at Franklin Templeton and excited about what we can do together.”

Western Asset Management Co. and Brandywine Global Investment Management, affiliates of Legg Mason, bring high assets in fixed income to the deal, and Clarion Partners brings real estate investments. “We are third overall in separately managed accounts,” Johnson said during the teleconference.

“Given all the strategic benefits and new capabilities, it makes the resulting company not only larger but far stronger. We will be a true leader in multiple asset categories,” she stated.

“We will have a wide range of strong performing strategies,” Johnson said, noting that 86% of Legg Mason assets under management have been beating their benchmarks. In addition, the deal transforms Franklin Templeton’s institutional business to meet the size of its retail business—creating a 50/50 institutional/retail mix. “Clients will have a broader range of investment choices,” she added.

As with any acquisition, the pending integration of Legg Mason’s parent company into Franklin Templeton’s, including the global distribution operations at the parent company level, will take time and will commence only after careful and deliberate consideration.

Johnson pointed out to teleconference attendees that Franklin Templeton has a history of large acquisitions, meaning it “understands the complexity involved in successful execution. She said Greg Johnson will play a key role in the execution of the deal.

Following the closing of the transaction, Johnson will continue to serve as president and CEO, and Greg Johnson will continue to serve as executive chairman of the Board of Franklin Resources Inc. There will be no changes to the senior management teams of Legg Mason’s investment affiliates. Global headquarters will remain in San Mateo, California, and the combined firm will operate as Franklin Templeton.

However, EnTrust Global, a Legg Mason affiliate that provides alternative investment solutions, and Franklin Templeton jointly agreed that it was in their best interest that EnTrust repurchase its business, which will be acquired by its management at closing. EnTrust will maintain an ongoing relationship with Franklin Templeton.

Franklin Templeton notes that while cost synergies have not been a strategic driver of the transaction, there are opportunities to realize efficiencies through parent company rationalization and global distribution optimization. These are expected to result in approximately $200 million in annual cost savings, net of significant growth investments Franklin Templeton expects to make in the combined business and in addition to Legg Mason’s previously announced cost savings. The majority of these savings are expected to be realized within a year, following the close of the transaction, with the remaining synergies being realized over the next one to two years.

The transaction has been unanimously approved by the boards of Franklin Resources Inc. and Legg Mason Inc. It is subject to customary closing conditions, including receipt of applicable regulatory approvals and approval by Legg Mason’s shareholders, and is expected to close no later than the third calendar quarter of 2020.

Johnson noted during the teleconference that the deal also offers growth in international markets, such as the UK, Japan and Australia. “Our focus is to grow for many years to come,” she said.

Compliance February 18, 2020

District Court Dismisses Fidelity FundsNetwork Revenue Sharing Challenge

The lawsuit sought to portray Fidelity as a functional fiduciary that was inappropriately collecting revenue sharing payments from third-party mutual fund companies.

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The U.S. District Court for the District of Massachusetts has ruled in favor of Fidelity Investments’ motion to dismiss a consolidated lawsuit alleging it is receiving “secret” or “kickback” payments from mutual fund providers on its FundsNetwork platform.

The ruling comes about eight months after Fidelity filed its dismissal motion, which has successfully argued the firm is entitled to negotiate and collect revenue-sharing fees from mutual fund companies in exchange for access to its “mutual fund supermarket,” as well as for its administrative services. Plaintiffs in the case argued, unsuccessfully, that Fidelity’s ability to influence its own compensation collected via the FundsNetwork platform makes the firm a fiduciary to retirement plans investing in funds via the platform—which in turn would restrict the types of fees it could collect.

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Several lawsuits filed against the firm in recent years have claimed revenue-sharing payments tied to the FundsNetwork platform violate the prohibited transaction rules of the Employee Retirement Income Security Act (ERISA), as well as the statute’s fiduciary rules. In its dismissal motion, Fidelity argued that it is entitled to negotiate and collect these fees, and that siding with the plaintiffs in the consolidated lawsuit would be detrimental to retirement savers because of the potential chilling effect on the vibrant mutual fund marketplace.

The dismissal ruling explains that in January 2017, Fidelity began charging mutual funds “infrastructure fees,” which are calculated based on the assets of the plans invested in the mutual funds. Case documents show Fidelity negotiates these fees with mutual fund managers, and that Fidelity has tripled the amount of the infrastructure fees charged to mutual funds since January 1, 2017—first by doubling them effective January 1, 2018, and then increasing them by another 50% effective January 1, 2019.

Plaintiffs in the case argued that mutual fund companies pass on the additional costs of the infrastructure fees to retirement plan clients through their investment fees, with the result that the plans and their participants ultimately pay more (via higher expense ratios) than they agreed to pay in their investment contracts. The Fidelity defendants, on the other hand, argued the case should be dismissed for a failure to state a claim upon which relief can be granted, pursuant to Federal Rule of Civil Procedure 12(b)(6).

In the ruling, the District Court explains that the essence of the plaintiffs’ first theory of liability is that by requiring the payment of infrastructure fees from mutual funds that participate in FundsNetwork after the plans have entered into their contracts with Fidelity defendants, these defendants have unilaterally increased the amount of their compensation from the plans. As such, the plaintiffs contend that Fidelity is a fiduciary under ERISA “by virtue of its discretion and exercise of discretion in negotiating/establishing its own compensation by and through its setting of the amount and receipt of the infrastructure fee payments.”

“Plaintiffs’ first theory fails because they concede that defendants negotiate the payment of infrastructure fees with the mutual funds,” the ruling states. “Plaintiffs’ theory also fails because the complaint does not plausibly allege that the mutual fund managers who pay the infrastructure fees to Fidelity are required to pass on the costs of the fees to the plans or to the participants who invest in their mutual funds. Rather, the decision of whether to pass on those costs is made independently by the mutual fund managers, not by Fidelity. Plaintiffs have therefore failed plausibly to allege that defendants unilaterally control the terms of the compensation they receive from the plans. Without such control, defendants are not fiduciaries with respect to the compensation they receive from the plans.”

The decision notes that the plaintiffs’ second theory (also unsuccessful) is that the defendants are fiduciaries with respect to their use of omnibus accounts through which plan investments are made.

“This theory also fails because plaintiffs do not allege that, as directed trustees of the omnibus accounts, defendants fail to follow the instructions they receive from plan sponsors and participants as to which mutual funds are selected for investment, or how the investments should be allocated,” the ruling states. “Nor do they allege that defendants improperly redirect the investments of plan participants, like plaintiffs, through the omnibus accounts from mutual funds managed by companies that do not pay infrastructure fees to mutual funds managed by companies that do. The court therefore rejects plaintiffs’ second theory of defendants’ fiduciary status.”

The plaintiffs’ third theory is that the Fidelity defendants are plan fiduciaries because they control the menu of investment options available to the plans. This theory also fails, because the relevant contracts make clear that it is the plan sponsors—not the defendants—who select which investment options are made available to the plans’ participants from the FundsNetwork.

“Selecting the funds available on the FundsNetwork Platform does not, without more, transform Fidelity into a fiduciary,” the ruling concludes. “As several other courts have held, having control over the broad menu of investment options from which plan sponsors may choose their plan’s investment options does not transform a platform provider into a functional fiduciary.”

The full text of the dismissal ruling is available here.

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