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The Wall Street Journal[1] recently reported that Nelson Peltz’s activist fund Trian, is trying to bring Invesco (NYSE: IVZ) and Janus (NYSE: JHG), two publicly traded asset managers, together because the asset manager industry has been struggling due to the rise of cheap index funds and ETFs (Blackrock, Vanguard, State Street[2]).

The WSJ reports that Trian holds a 9.9% stake in each, but that’s a little misleading when we dig deeper into Peltz’s 13D filings[3]. If we visit the ol’ EDGAR[4] site, Trian’s filing actually states that it holds 36,739,343 shares of Invesco, which amount to 8%[5] of Invesco’s shares. Why the 2% distinction? Because 8,718,084 of those Invesco “shares” are actually derivatives which do not give Peltz the power to vote those shares until he exercises them, which has its own costs[6]. Peltz’s stake in Janus does not have the same issue as it appears to be all common shares.

The filing also reveals that Peltz’s cost basis in Invesco is $10.74/share and $21.45/share in Janus. And because we know Invesco is currently trading at $11.85, and Janus is currently trading at $25.05 (as of Friday’s close), Peltz must be a little pleased[7]. Maybe the WSJ report already did its job. On the other hand, we all know how volatile the market is and that gain may not last especially if the merger doesn’t happen[8].

What is the likelihood of a merger?  Well, for one thing, Trian is signaling to the market that it is serious about this since it holds large stakes in both of the companies[9]. When you factor in 8% and 9.9%, respectively, that comes out to a nearly $800 million investment. And the market’s initial response (or maybe hot take to the news) is the resulting 17% increase in Janus’ stock[10].

Why am I thinking about ownership? Because in any M&A transaction, the target’s shareholders would have to vote on the transaction. The buy side shareholders probably would not depending on what the merger consideration[11] is and whether any new shares would have to be issued. Irrespective of whether the seller’s shareholders or both the seller and buyer’s shareholders have to vote, there are some significant shareholders in both Invesco and Janus that we know for certain would have to vote in a transaction.

The current institutional base of each entity has some overlap (see the bolded names):

• Janus

  • (1) Dai-ichi ~17%; (2) Trian ~9.9%; (3) Silchester ~9.4%; (4) Vanguard ~8.1%; (5) BlackRock ~7.3%; (6) Capital Research ~3.1%; (7) Dimensional ~3.1; (8) State Street ~1.8%; (9) Norges ~1.8%; (10) Schwab ~1.5%

• Invesco

  • (1) Massachusetts Mutual Life ~ 17%; (2) Vanguard ~10.5%; (3) BlackRock ~8%; (4) Trian ~8.0%; (5) Bank of America 4.4%; (6) State Street 4.2%; (7) BNY Mellon 2.6%; (8) Dimensional 2.0%; (9) Geode 1.8%; (10) – Merrill 1.4%

Vanguard, Blackrock, Dimensional, and State Street are four investors who are in the top ten shareholders for both Janus and Invesco, representing 20.3% and 24.7%, respectively. When you add Trian’s stake to that it becomes 30.2% and 32.7%, respectively. So, if only 60-70% of the shares outstanding actually show up at a proxy contest (or if there’s no resistance and its just a special meeting to vote on the merger), Trian is already very close to a win if it can get those four shareholders to vote their proxy. That creates quite a bit of leverage if you’re Trian and you’re about to meet the Board of those companies.  

But, let’s posit for a second that Peltz is correct, and that combining the two companies will create more shareholder value. Does voting for the merger of two consolidating asset managers make sense from the point of view of Vanguard, Blackrock, State Street, and Dimensional when the purported purpose of a Janus – Invesco merger is to compete with those same folks?[12]

Trian may be thinking about this and competition. Remember Trian is the fund that lost the DuPont proxy contest back in 2015 because Vanguard, Blackrock, and State Street went against Trian. Following the results, Martin Schmalz delved into the anti-competitive incentives of the Index funds and noted that because the Index Funds had holdings in both Monsanto (DuPont’s primary competitor) and DuPont, voting for Peltz to make DuPont more competitive (arguable) would not be in the Index funds best interests. Afterall, a successful Peltz would mean cash transfers from Monsanto to DuPont (which the Index funds wouldn’t really care about having holdings in both) and both Monsanto and DuPont might suffer from increased competition[13].

But, Trian also has more recent history, winning over Vanguard and Blackrock in its more recent contest at P&G (the largest proxy contest in activist history) and in the financial sector with its investment in Legg Mason ending in an acquisition by Franklin Resources. So, let’s not count them out yet, shall we.

[1] https://www.wsj.com/articles/trian-fund-management-takes-stakes-in-invesco-janus-henderson-11601599399

[2] Yeah, it’s a common refrain

[3] Dear reader, I read this so you don’t have to.

[4] Actually, the new format looks pretty good SEC, nice job.

[5]  Peltz started building his stake months prior to this 13D filing. His second quarter 13F successfully masked these holdings for a short period under the cloak of confidential treatment with the SEC.

[6] $99 million actually. Why did the WSJ report the larger number? Well, its possible that someone at Trian told them that they have a 9.9% stake in each. That would not technically be incorrect if the difference in holdings is a derivative exercisable within 60 days. It is somewhat misleading though since Trian would not be able to vote those derivatives until they are exercised, and that’s only if the underlying asset is equity-based, not cash-based. This was a point of contention in the ADP-Ackman contest, when Ackman claimed to own a certain percentage of ADP and ADP proceeded to take him to the woodshed when they explained that only a small percentage of that ownership was voteable in a proxy contest.

[7] “We’d rather be rich than right”

[8] Or rather, that increase in price might be the market factoring in the probability of a merger since Janus has already jumped by 17%.

[9] The companies aren’t whales, but they are a significant size. Peltz doesn’t like to be called an activist, but well, most people consider him one, and this is fairly large by activist standards.

[10] Janus is smaller, so I’m treating it as the target.

[11] For example - is it a share for share swap? If so, does buyer need to issue more than 20% of its outstanding in order to compensate seller’s shareholders? Sometimes the buyer will structure the transaction just to avoid a buyer shareholder vote (see Occidental, V. Holub, Buffet)

[12] From the WSJ, “BlackRock, Vanguard, and State Street Corp. collectively controlled roughly 80% of all U.S. ETF assets as of August, according to Morningstar.”

[13] Martin C. Schmalz, https://ericposner.com/martin-schmalz-how-passive-funds-prevent-competition/