Franklin's fiscal first-quarter 2014 earnings outpaced the Zacks
Consensus Estimate and were above the prior-year quarter earnings
as well. Results were aided by top-line growth, a healthy capital
position and increased level of assets under management (AUM).
However, higher-than-expected expenses depicted undisciplined
expense management. We believe Franklin's global footprint is an
exceptionally favorable strategic point as its AUM is well
diversified. The company is also poised to benefit from its recent
acquisitions, efficient capital deployment activities and a strong
balance sheet. However, regulatory restrictions and a sluggish
economic recovery could mar AUM growth and increase costs.
Franklin Resources Inc. (BEN), headquartered in San Mateo,
Calif., is a global investment management company. The majority of
its operating revenue and net income is derived from investment
advisory and related services to retail mutual funds, institutional
and private accounts and other investment products. Related
services include transfer agency, fund administration, custodial,
trustee and fiduciary services. The mutual funds and other products
are sold to the public under seven brands: Franklin Templeton,
Mutual Series, Bissett, Fiduciary Trust, Darby, Balanced Equity
Management and K2.
Franklin's principal line of business provides investment
advisory and management services. Fund shares are offered to
individual investors, qualified groups, trustees, tax-deferred
(such as IRA) or money purchase plans, employee benefit and
profit-sharing plans, trust companies, bank trust departments and
Effective Jul 1, 2012, Franklin has 1 operating segment -
Investment management and related services. Previously, a secondary
operating segment - banking/finance existed, which offered select
retail banking, private banking and consumer lending services.
During the fiscal year ended Sep 30, 2012, the company
significantly reduced these services and now offers only select
private banking services to investment management clients.
As of Dec 31, 2013, Franklin employed approximately 9,100
employees and operated offices in 35 countries with $879.1 billion
In Jun 2013, Franklin completed the purchase of the remaining
80% stake in Pelagos Capital Management, LLC, an independent
investment advisor. Franklin had previously purchased 20% stake in
Pelagos in 2010.
On Nov 1, 2012, Franklin acquired approximately 69% of the
equity of K2 Advisors Holdings LLC, a fund of hedge funds solutions
provider. The purchase consideration included a $182.9 million cash
investment in K2, which was primarily used to retire $176.5 million
of debt immediately following the acquisition. The company also
agreed to acquire K2's remaining equity interests over a multi-year
period beginning fiscal year 2017, resulting in the conversion of
this equity to a liability. The amount of the liability is
contingent on K2's future revenue and profits and had an estimated
fair value of $96.8 million as of Jun 30, 2013. This amount is
based on payments of $12.9 million in fiscal 2014-2015, $56.0
million in fiscal years 2016 2017 and $98.7 million thereafter.
In Jul 2011, Franklin acquired all the outstanding shares of
Balanced Equity Management Pty. Limited (BEM) for a purchase
consideration of $64.1 million in cash and common stock. BEM is a
specialist Australian equity manager with approximately $10.9
billion in assets under management as of the acquisition date.
In Jan 2011, Franklin acquired all of the outstanding shares of
Rensburg Fund Management Limited (Rensburg), a specialist UK equity
manager, for a purchase consideration of $72.4 million in cash. The
purchase price allocated $52.6 million to indefinite-lived
intangible assets, $10.2 million to tangible net assets and $9.6
million to goodwill. The indefinite-lived intangible assets relate
to management contracts. At acquisition date, Rensburg had
approximately $1.5 billion in AUM relating to various UK unit
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