Industrial conglomerates: Spin off in haste, repent at leisure

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Asset management IPOs are part of a growing trend to undo conglomerates.

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It has happened in the US, notably at General Electric. Now Europe is also dismantling its industrial conglomerates. After this spring’s IPO of Siemens Healthineers, Volkswagen and possibly Daimler are listing their trucks businesses. Continental is listing its Powertrain business. Thyssenkrupp is splitting in two.

By demerging, chief executives might steal a march on Europe’s increasingly vocal activists. And, yes, there is a bank equivalent. Deutsche Bank listed its asset manager, DWS, in March. That followed Crédit Agricole and Société Générale’s equivalent 2015 IPO of Amundi, and in June this year, SocGen listed its car-leasing unit, ALD. Investec announced plans for a London and Johannesburg IPO of its asset manager in September.

Some European banks look just as big and lumbering as the worst industrial conglomerates. Their tentacles reach beyond banking. Asset management is not core to their role as financial risk-takers.

At best, subsidiary listings will draw attention to the group’s best-performing part, re-rating the whole. Berenberg says Amundi merely makes Crédit Agricole a curate’s egg: good in parts but bad as a whole. Yet greater independence can free up both sections to perform better, reducing the burden on management time, and perhaps on costs if the demerged entity is unnecessarily entangled into the parent’s systems and processes.

It is harder for management of older groups to seek investor kudos for cost-cutting if an important part is in a faster-growing sector. The two equity stories may be contradictory.

Compelling

Selling down via an IPO becomes even more compelling if the parent, like in the banking sector, needs capital – especially when valuations for the demerged entity are reaching a peak, which seems to have been the case in asset management earlier this year. Shares in Blackrock have fallen by a third this year and Amundi shares are down about 20%. Investors in DWS’s IPO may have come too late to the party, given its 30% drop since March.

The danger, in industrials as in banking, is that a break is short-sighted. The parent’s stock-price uplift may be temporary, and diversification might come back in fashion after a crash. Banks, moreover, are relatively natural owners of asset managers. Mainly captive fund houses like Eurizon are much more efficient than the big US independents. Banks such as HSBC also see more scope to cross-sell asset management to their wholesale and private-banking arms.

Unlike in the US, demergers in Germany are happening more as IPOs than spin-offs, largely due to the greater power of family owners and trade unions. Most banks (possibly except Investec) will similarly want to retain a majority in their asset managers, even if the latter will have good use for the added equity-financing capacity of a separate listing.

European bank-owned asset managers, both global firms and captives, face new long- and short-term pressures from monetary policy, regulation and the rise of passive funds. They must look to work more closely with other asset managers, perhaps especially those owned by other European banks, even while retaining the benefits of being part of its parent’s network. An IPO makes it easier to do the former, but potentially harder to do the latter.