What Beyoncé can teach companies about M&A

If you could have bought the future earnings of the members of Destiny’s Child in 2001, would you really have turned it down because you weren’t sure where Kelly Rowland’s career was headed?

That’s a good analogy for Ares Management’s interest in AMP, the Australian asset manager that’s lost more than two-thirds of its value over the past three years amid an official investigation into misconduct in the financial sector, combined with boardroom turmoil and a sexual harassment scandal. While the focus has been on the problems of AMP’s retail divisions, it still has a Beyoncé on its books that a bold investor can pick up on the cheap.

Years of bad publicity have been devastating to AMP’s retail-focused wealth management business. Revenues that were running at more than 1.1% of assets under management five years ago will be in the region of 0.7% this year. Even that is not enough to stem the flood of withdrawals from customers. Net cash outflows since the start of 2018 have amounted to about A$14.67bn, equivalent to nearly half a billion dollars a month.

Things look very different, though, when you consider AMP Capital. This division is a global infrastructure and real estate business that could be likened to Macquarie Group, with investments in airports, rolling stock, parking garages and office blocks across multiple continents.

Macquarie is valued at about 7.6% of its A$607bn in assets under management, at the higher end of the typical 3% to 8% range for the sector. Ares, for its part, runs at about 6.1% of its $179 billion assets under management. Even after surging 22% on Friday on news of the takeover interest from Ares, the whole of AMP is worth only A$5.36bn. That is about 3.4% of AMP Capital’s A$190bn in assets under management, and 2.1% compared with the A$253bn at the group as a whole.

Suppose the retail-focused wealth management business and bank turn out to be duds. Ares is still picking up a global infrastructure investor on the cheap, at a time when the prospects for such businesses look rosy. Record-low interest rates and pandemic-hit global economies are likely to start channelling yet more money into physical assets over the coming years.

The problems with AMP’s core business have even been modestly beneficial to AMP Capital. The fees it charges to the company’s wealth management arm, at 18.1 basis points in the first half of this year, are not much more than a third of the 45.7 basis points levied on external investors. As AMP’s wealth management customers withdraw their cash and external investors show ongoing demand, that is weighting the business more and more towards its most profitable clients. Fee income in 2019 was up 56% over its levels five years earlier.

To be sure, any buyer is going to have to decide what to do with those retail businesses. It is anyone’s guess when the tarnished image of AMP’s wealth management arm will recover. Meanwhile, its bank has a A$20.21bn mortgage book that is likely to suffer from a shaky pandemic-hit property market and net interest margins that are being squeezed by competition. 

Still, it is not impossible that a new American owner could help on that front. AMP was traditionally one of Australia’s most widely held stocks. Only Commonwealth Bank of Australia has more individual shareholders than AMP’s 723,387. That means that the twists and turns of its half-yearly reporting cycle are a constant reminder of its troubled past to local investors who should be its core customer base. If you wanted to rebuild AMP’s image, there would be worse ways of doing it than burying its performance in humdrum aggregate numbers reported out of Los Angeles.

Bloomberg