Active managers are consolidating under pressure from low-cost ETFs.

Franklin Templeton will become a $1.5 trillion behemoth after its acquisition, announced Tuesday, of rival Legg Mason (NYSE: LM) for $6.5 billion including debt. (MorningStar)

Franklin Templeton will pay $50 per share of Legg Mason in cash. That marks a premium of $10 over the latter’s Monday closing price. In addition, it will assume $2 billion of the latter’s debt.

Consolidation pressures?

“Active managers are closely mapping out their future trajectory amid fee compression, outflows and the threat from passive funds,” said  Morningstar’s head of fund research Jonathan Miller. He was speaking in the context of the Franklin Templeton-Legg Mason deal.

Last year, Martin Flanagan, chief executive officer of Invesco predicted that downward pressure on revenues and upward pressures on costs would force the asset management industry to face “dramatic changes.”

“The strong are getting stronger and the big are going to get bigger,” Flanagan said.

According to Miller, the scale of the Franklin Templeton-Legg Mason deal would catapult the combined firm into the global top six.

Business mix changes at Franklin Templeton

Director of North American fixed-income strategies for Morningstar Karin Anderson observed that the merger would change the asset mix at FT. It would skew more towards fixed income.

She said this would be as a result of the inclusion of Western Asset Management’s significant fixed income platform. The business represented more than half of Legg Mason’s managed assets.

Moreover, this would give FT “diversification away from the Global Macro Team’s strategies led by Michael Hasenstab. These account for a large share of Franklin’s current fixed-income platform and have experienced significant outflows recently.”

Franklin Templeton boss Jenny Johnson strikes a feisty stance

FT chief Jenny Johnson will lead the combined entity.

However, she shrugged off the wave of consolidation deals in the industry, denied that the sole purpose of the deal was to cut costs, and said instead it was about “offense, not defense.”

She said to FT: “It is about having an all-weather product line-up and world-class distribution platform.”

Greg Johnson, executive chairman of the Board of Franklin Resources, Inc. said the acquisition would drive growth through scale, diversity, and balance across investment strategies, distribution channels, and geographies.

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