J. Christopher “Chris” Donahue’s long-term view paid off when Federated Investors Inc. acquired a majority interest in Hermes Investment Management in July 2018 for approximately $340 million.
“This has been a big deal for us,” says Donahue, president and CEO. “One of the things that’s really exciting about it is that we were working on this deal for almost six years. The analysts had thrown in the towel on me, saying, ‘Yeah, you guys are never going to do anything.’”
Hermes is a London-based pioneer of investment strategies that consider environmental, social and governance criteria, with around 400 employees. It was created by a British pension plan, BTPS, which retains 30 percent ownership with the option to sell the residual to Federated after three years.
“We made offers, and then finally they were ready and that’s why it happened. So, this took a lot of patience and perseverance,” he says, adding had Federated been able to buy its majority interest five years ago, the price would have been lower, but it was still a fair deal.
It’s unusual for a public company to have the patience to wait six years to close a deal. However, Federated has an AB stock structure, with the voting stock controlled by the original families. Analysts can comment, but they don’t influence operations, enabling the company to accomplish a long-term, sustainable investment.
The combined companies had annual revenue of $1.135 billion last year with about $460 billion in assets, and while Federated was the larger business, with about 1,500 employees, Donahue calls it a reverse transformation. He plans to incorporate Hermes’ investment strategy and international footprint into the Pittsburgh-based investment management company.
“Usually the person doing the buying transforms what was bought. We’re going to do it exactly the reverse,” says Donahue, whose father started the company with two high school friends.
The acquisition is one of the biggest in Federated’s 64-year history. Of its 60 mergers and acquisitions, all but a few were asset roll-ups, including the purchase of $14 billion in assets from PNC Financial Services, which was announced in May.
“There really was no overlap of investment management between our companies. This is not one of those deals where you misuse the word synergy,” Donahue says. “To investment analysts, synergy means dead people. To us, synergy means that you have complementary investment managements that can advance the ball for the future.”
Take the long view
Donahue — who took over as CEO in 1998 — says when doing a merger, one of the first things the investing community looks at is how much money will be saved by cutting expenses. With Hermes, Federated didn’t plan to cut any expenses.
“We’ve told the Street this year that we’re going to invest at least $5 million more this year in various marketing of our Hermes products over here in the U.S,” Donahue says. “That is certainly not going to be a positive for current earnings, but we wouldn’t make that bet if we didn’t think it was a good bet for longer-term earnings.”