Are Perpetual Limited & IOOF Holdings Limited about to merge?

The Fairfax and News Ltd press are this morning reporting that equities managers and fund administrators Perpetual Limited (ASX: PPT) and IOOF Holdings Limited (ASX: IFL) could merge in the year ahead.

For investors these are two average businesses that could certainly save on costs by for example cutting some of their shared services on completion of a merger. Areas like human resources, risk, compliance, IT, and office space costs could be reduced as shared services, while the scalability of their fee-earning operations in the funds management and administration space also means its possible to shed staff by reallocating responsibility.

Perpetual’s chief executive, Geoff Lloyd,  has form in this area having executed its Transformation 2015 strategy (with the help of corporate executioner Bain Group) to cut costs and staff levels by more than a quarter since 2012. Perpetual also completed the acquisition and integration of the Trust Co. into its Corporate Trust division in the last couple of years.

However, merger, integration and cost saving plans can sometimes look good on spreadsheets or power point presentations, but the reality of executing is often harder to achieve. IOOF also has a reputation for brushing problems under the carpet and cost savings across its risk, compliance or corporate governance operations are unlikely to be top of the agenda.

Cost savings are seemingly not always a priority at Perpetual either, with Fairfax reporting how it has recently spent $10 million upgrading its executive meeting and boardrooms at its Angel Place headquarters.

I reckon Perpetual’s boardroom was already quite comfortable after its board seemingly slept through the GFC by failing to react to cuts costs in response to the event, until about three years after its bottom in March 2009.

Although the post-snooze 2012-2015 cost cutting program has lifted earnings at Perpetual it still faces its own Sisyphean task of consistently growing funds under management and revenues.

The average investment performance, distribution capabilities, and shareholder focus all mean it looks a stock to avoid for long-term focused investors.

Rather than a merger with IOOF, I expect a hostile takeover bid from the newly combined Janus and Henderson Group (ASX: HGG ) is more likely as the new power player has made no secret of its plans to acquisitively grow in Australia.

However, the executive teams at Perpetual and IOOF may be more attracted to each other on the basis that greater scale could help them resist a hostile Janus / Henderson takeover bid that could force a greater focus on shareholder returns.

Big, Fat, Dividends

This company's dividend is almost the stuff of legends. Its reliable cash flows support a high payout ratio, and the company's stash of franking credits are the cherry on the top of the dividend cake. Based on the last 12-months of dividends, shares are offering a fully-franked 6.5% yield, which grosses up to a whopping 9.3%, when those franking credits are included.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find him on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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