Is the honeymoon over for Man Group and GLG?

LONDON Wed Nov 2, 2011 5:22pm GMT

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LONDON (Reuters) - A tumbling share price and further client outflows have made for a rocky first year for a combined Man Group (EMG.L) and GLG, leaving some asking if the union will ever find its 'happily ever after'.

As it prepares to unveil interim results on Thursday, the world's largest listed hedge fund firm faces shareholder frustration after September's revelation of $2.6 billion (1.6 billion pound) of outflows -- with GLG in particular suffering -- which sent its shares plunging 25 percent in a single day.

While many of Thursday's figures were already flagged up in that update, some analysts think Man could use a chunk of its $1 billion regulatory capital surplus for a share buyback or special dividend.

Whether such a move would appease investor discontent over the $1.6 billion deal to buy GLG -- which CEO Peter Clarke once described as "the most significant move in alternative investment that we have seen" -- remains to be seen.

Opinion has so far fluctuated as to whether it was a shrewd move that diversified Man's business and rebuilt assets -- a view prevalent after GLG's inflows in the first half of 2011 -- or a costly, ill-judged departure from the firm's heritage of computer-driven funds.

"Man had a very tidy business, there was nothing wrong with that at all. But they forget the blonde that brought them to the party," said Chris Cruden, CEO of Insch Capital, referring to the now $24.9 billion AHL computer fund, of which he was one of the first employees.

"Clearly GLG was overpriced. If you were to price GLG as a stand-alone asset management business today, what value would you put on it? Man's share price is unquestionably being pulled down by GLG," he said.

A graph of Man's share price makes unpleasant viewing for all but hedge fund short-sellers.

STOCK FALLS

The stock has almost halved since the GLG deal closed a little over a year ago, while the FTSE 100 .FTSE in comparison has fallen just 5 percent.

Since Clarke took over from hedge fund industry 'godfather' Stanley Fink in March 2007 -- just months before the onset of the subprime crisis -- Man's shares are down by nearly three-quarters, although this does not take into account the $1.40 shareholders received after Man's sale of brokerage MF Global.

While some analysts point to the shares' cheap valuation, a number of shareholders question management's strategy and ask if a bid -- most likely from a U.S. asset manager -- could appear.

"They need to start thinking very, very carefully about what they do because otherwise they have to put themselves up for sale totally," said a top 30 investor who asked not to be named.

"Their track record with acquisitions has been less than brilliant to put it mildly ... Basically the market has written off the $1.6 billion (Man paid for GLG)."

Man Group declined to comment.

MAN MANAGEMENT

GLG is the latest in a chequered past of deals by an historically acquisitive firm that was originally founded as a sugar cooperage and brokerage in the eighteenth century.

For instance, in 2008 the firm paid $235 million for half of U.S.-based credit manager Ore Hill, only to see its assets plunge during the credit crisis. Man bought the other half for just $18 million earlier this year.

"We believe that the firm is ripe for a management reshuffle or takeover given the litany of problems that have arisen these past few years," said one top-15 institutional shareholder on condition of anonymity, adding they had cut their holding.

However, commentators admit that there could be a shortage of suitors, given the capital shortfalls facing many European banks and rules restricting U.S. banks investing in hedge funds, meaning a large asset manager would be the most likely bidder.

"Does the share price fall make Man more vulnerable to a takeover? It potentially does," said Singer analyst Sarah Ing.

"You've got AHL, with a net management fee margin of more than 200 basis points -- what's that worth on its own? A takeover is always a possibility. The question is whether there's anyone out there running the slide rule over it."

A sale of GLG, meanwhile, would appear unlikely, as it would crystallise a loss for Man and hurt Clarke's own reputation.

CRITICISM

Former CEO Fink, now heading fund firm ISAM, pulled no punches when asked for his verdict on Man's recent strategy.

In a recent interview with Reuters he disagreed with the purchase of GLG and said he would have preferred to keep Man's 25.5 percent stake in Bluecrest, a firm with a large computer-driven fund.

"Bluecrest was high quality business for me. I would not buy GLG for that amount, I'd rather have bought Bluecrest," he said.

However, there appear to be few calls for Clarke to step down, with the 2011 inflows still net positive and a bumper return of some of Man's $1 billion capital surplus seen likely.

"One bad quarter does not oust a CEO," said Peter Lenardos, analyst at RBC Capital Markets, who expects a special dividend, share buyback or combination of the two.

"In terms of strategic direction the firm is on a firm footing... Everyone's writing Man Group and Peter Clark's obituary and I think that's a bit premature."

(Additional reporting by Stanley Carvalho in Abu Dhabi, Sinead Cruise and Tommy Wilkes in London; Editing by Helen Massy-Beresford)

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