EUROZONE: Inquest follows ‘Staberdeen’ merger

The £660 billion ($810 billion; €762 billion) merger between Standard Life and Aberdeen Asset Management will form the UK’s largest real estate asset management business and one of the biggest in Europe.

Their union creates a £40 billion gorilla: Standard Life manages £22.2 billion to Aberdeen’s £17.9 billion, as at the end of 2016.

Standard Life Aberdeen, the combined business’s provisional name, or ‘Staberdeen’ as dubbed by some at last month’s MIPIM conference, was greeted with a sense of optimism by the market and, of course, by Keith Skeoch and Martin Gilbert, respective chief executives at Standard Life and Aberdeen.

But, since then, support has waned and skepticism grown as speculation mounts over how satisfied Aberdeen is with the unequal nature of the merger, reportedly a one-third/two-thirds split in favor of Standard Life. The implication is that the deal was more like a passive takeover than a merger.

There is further speculation over the number of job losses that will result from the merger – some reports estimate 1,000 jobs could be culled as the combined entity cuts costs and ousts underperforming fund managers. The joint CEOs have denied this, but with both men claiming in early March that the deal would save £200 million, something has to give.

Of course, the key to any property merger is integration, particularly with real estate fund management businesses that rely heavily on people. This point also puts the departure of Standard Life’s head of equities, David Cumming, immediately after the merger announcement, in finer context.

At present, David Paine heads Standard Life’s real estate division, while his counterpart at Aberdeen is Pertti Vanhanen. Both men undoubtedly have worked hard to reach their positions but one, if not both, will inevitably lose out for the combined company’s top real estate role. If staff from either side feel they, too, are losing out, they may well follow Cumming out the door. Moreover, competitors will be eyeing key individuals and teams, so retaining the right talent will be a priority.

This sort of uncertainty could lead to reduced fund inflows and, in some cases, even outflows. However, between now and the transaction being completed, the two firms will surely have to announce a more detailed integration plan in order to minimize that uncertainty, as well as any potential departures.

Standard Life and Aberdeen not only have a shared future but also a shared recent history. Last summer, both were mired in the nerve-jangling redemption run on their UK open-ended real estate funds in the aftermath of June’s EU referendum.

Just two weeks after the vote, Standard Life was the first of seven affected UK firms to shutter its fund, valued at £2.9 billion, in order to stop withdrawals. The firm opted to suspend the fund for an initial 28 days, with a further review every 28 days. Standard Life eventually reopened the vehicle in early September, and although it was the penultimate firm to do so, calm had been restored to the market by that point.

Aberdeen took a slightly different route to its peers. It followed Standard Life’s lead by initially gating its £3.9 billion vehicle. But within two days, had enforced a heavy price reduction, making investors accept a 17 percent cut if they withdrew capital. This was followed by the sale of several London-based assets in order to increase liquidity – a move which evidently succeeded because Aberdeen was the first of the affected firms to lift its fund suspension in mid-July, just three weeks after the vote. Both firms received praise for their handling of the mini-crisis which, at one point, saw around 60 percent, or £15 billion, of the UK’s open-ended property funds under lock and key – the episode was one of the first tangible impacts of the Brexit vote.

Looking ahead, both Skeoch and Gilbert will hold equal co-chief executive roles at Standard Life Aberdeen. But with such an unequal merger, many real estate commentators have already suggested Gilbert will be the first to move on. There is an old investment banking adage which reflects on the benefits of joint leadership: ‘co-heads equal no heads.’ If one does go, it will be interesting to note what that means for the new £40 billion gorilla in the room.