Invesco CEO bulking up to surpass rivals

By Aaron Pressman

BOSTON (Reuters) - Invesco's chief executive took the job four years ago after leaving larger rival Franklin Resources, where he shared the top post.

This week, Martin Flanagan finally may have bested his old firm by agreeing to buy the retail fund management business of Morgan Stanley (MS.N), including the Van Kampen family of funds, for $1.5 billion (910 million pounds). By adding $119 billion of funds from Morgan Stanley to Invesco's $417 billion, Flanagan is poised to surpass Franklin's (BEN.N) $523 billion of assets under management.

The deal, which is expected to close by the middle of 2010, will also likely vault Invesco into the top 10 largest U.S. mutual fund managers (excluding money market funds). That will give Invesco the scale to better compete for business from the largest brokerage and banking firms, analysts said.

Flanagan maintains Invesco already had sufficient scale, but grabbed the opportunity to add some top-performing funds in areas where it was lacking.

Morgan Stanley manages $20 billion in municipal bonds and $30 billion in value-oriented U.S. stocks, for example, areas where Invesco has a much smaller presence.

"You need to be big enough, but scale is not our goal," Flanagan said in an interview. "Quality is our goal."

Adding closer ties to Morgan Stanley and its 18,000-strong brokerage force was also a draw. Morgan Stanley will own almost 10 percent of Invesco's shares after the deal closes, making it the largest shareholder.

To be sure, the Morgan Stanley deal still faces several challenges, beginning with the lengthy and expensive process of gaining approval from fund shareholders. Flanagan will also have his hands full retaining top managers, including some that Morgan Stanley may want to keep to run its institutional fund business.

'MORE COMPELLING'

"We're still in wait and see mode," said Morningstar analyst Greg Carlson after hearing a presentation from Invesco.

Managers of some of Van Kampen's best funds, such as the Van Kampen Comstock Fund and Van Kampen Equity & Income Fund, are expected to move to Invesco. But managers who also run money for institutional accounts Morgan Stanley will retain may not make the move, Carlson said.

Some of the funds being sold have also had problems attracting investors, according to data from Lipper, a fund research firm owned by Thomson Reuters. Investors have withdrawn $5 billion more than they have added to Van Kampen funds so far this year, on top of $4.7 billion of net withdrawals last year.

Still, performance has been good, with Van Kampen funds outperforming 65 percent of comparable funds over the past three years and 72 percent of competitors over the past year, according to Lipper.

Flanagan was first approached about a possible deal over the summer by Morgan Stanley CEO James Gorman. It was hardly the only money management unit being shopped to Invesco, Flanagan said.

"This was more compelling than anything else we saw out there," Flanagan said.