Are IOOF shares in the buy zone today after the MLC acquisition?

Is the IOOF Holdings Ltd (ASX: IFL) share price a buy today after the company’s recently announced acquisition of MLC Wealth?

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The IOOF Holdings Ltd (ASX: IFL) share price has not had a good week. Last Wednesday, the IOOF share price was asking more than $5 a share. Yesterday, IOOF shares closed at $3.62. IOOFed indeed, it’s not often you see a company’s market capitalisation declined by nearly a third over the space of 9 days. We’re still not at the levels we saw in the March crash (when IOOF got down to around $2.72 a share), but it’s still a significant move, and one that begs the question: are IOOF shares a buy today?

Why the IOOF share price has tanked

IOOF shareholders have not responded well to the mammoth capital raising that the company has completed over the past 2 weeks. IOOF has now completed the institutional placement, which has raised $734 million. Its retail investor placement is still underway and is expected to raise an additional $306 million.

For a company with a market capitalisation of just $1.27 billion, that represents a lot of share dilution. This explains why the company’s shares have tanked over the past week or so, in my view.

Are IOOF shares in the buy zone today?

So with such a massive fall in the IOOF share price, the question must be asked: are IOOF shares in the buy zone today?

Well, first thing’s first. The IOOF share price has declined because the share count has been massively increased. It’s not like this is your standard ‘value play, buy the dip’ opportunity here.

But let’s take a look at what IOOF is actually using all of this cash for. It was revealed on Monday that the company plans to acquire the wealth manager MLC from National Australia Bank Ltd (ASX: NAB) for $1.44 billion. MLC is one of the largest wealth managers in Australia. According to reporting from the Australian Financial Review (AFR), once the merger is complete, IOOF will be the largest wealth manager in the country, eclipsing long-time (and embattled) rival AMP Limited (ASX: AMP). The AFR is describing this outcome as a new ‘duopoly’ of wealth management in Australia.

Whilst this deal does help IOOF grow its market footprint, I still have doubts about its long-term future. Wealth management has not been shown in a good light over the past few years, largely due to the revelations of the 2018 banking royal commission. Retail superannuation funds (like those offered by IOOF and MLC) already have something of a reputation as ‘high fees, low returns’. With competition from industry funds and perhaps the low-fee champion Vanguard Group over the next few years, I think IOOF is facing challenges on multiple fronts. Investors seem a lot more excited about passive exchange-traded index funds (ETFs) than higher-fee active managed funds for outside-super investing these days as well.

Foolish takeaway

As such, I’m not wild on IOOF shares today, even after this share price crash, and I think there are better options elsewhere. If I was after a fund manager, I would choose Magellan Financial Group Ltd (ASX: MFG) shares instead.

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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. 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 Scott Phillips.

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