The British are coming to 1301 Second Ave. — to take possession of one of the most storied financial companies in the Pacific Northwest.
The London Stock Exchange Group (LSEG) is taking investment management and index giant Russell Investments off the hands of Northwestern Mutual for $2.7 billion.
The move caps months of uncertainty about the financial firm’s fate, after Northwestern had announced early in the year that it was mulling a sale. In May, LSEG said it was in exclusive talks to buy Russell to buttress its global financial-index business.
The purchase, expected to close in late 2014 or early 2015, fails to offer a clear picture of Russell’s presence in Seattle, where it employs some 900 people. While Northwestern, which has owned Russell since 1999, is also an outsider, based in Wisconsin, the new proprietor has many of the same lines of business.
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Russell’s financial-index business is a good fit with LSEG’s FTSE index operation. LSEG says it plans to remove duplication in the sales structure, combine research functions and engage in “management and back-office rationalization,” which usually means layoffs. LSEG is targeting annual cost savings of $78 million by the end of its third year in charge of Russell.
The other question is the fate of Russell’s investment-management business, which oversees $256 billion in assets and accounts for 64 percent of its earnings before interest, taxes, depreciation and amortization. LSEG says that segment is poised to grow and historically has been aligned with the index business, but added that it will “undertake a comprehensive review” to gauge the segment’s fit into the group. That means a spinoff is a distinct possibility. “I wouldn’t be shocked to see it be separated in some way,” said Morningstar analyst Gaston Ceron.
The review is expected to complete “at or following closing,” according to an LSEG presentation on Thursday.
Russell CEO Len Brennan will join LSEG’s executive committee. LSEG intends to put retention plans in place for “key Russell employees” to drive performance.
A spokesman for the LSEG Group declined to provide additional comment, saying it would be premature.
A Russell spokeswoman declined to comment on the jobs or on the company’s future role in Seattle. In a statement on the LSEG news release, Brennan said the combination creates “a truly global index leader.” As for the investment-management business, the company is “committed to maintaining the highest standards of client continuity and service.”
Russell, which has 1,800 employees worldwide, was founded in Tacoma in 1936 and transplanted to Seattle in 2010. At that time, it had just bought defunct Washington Mutual’s landmark building on Second Avenue, which it sold in 2012 at a tidy profit. Russell occupies more than 200,000 square feet of space in about five floors of the 42-story building, of which it is the namesake tenant.
LSEG’s pursuit of Russell comes in the midst of a planetary race among financial-index providers to consolidate as well as provide products suitable to an increasingly global base of clients. The sector is experiencing rapid growth as investors increasingly adopt passive investment strategies, based on products such as exchange-traded funds. Many of these so-called ETFs are linked to financial indexes.
Index providers like S&P Dow Jones Indexes, MSCI and Russell make money from providing the data they crunch to financial firms and collecting fees from ETFs and other financial products linked to their information.
The revenue for Russell’s indexes has been growing at a compound rate of 10 percent annually since 2011, LSEG said. Russell is the top index provider to U.S. institutional investors, LSEG said.
That gives the London giant a royal pathway into a competitive market.
“North America is a relatively tough market to break in the data space, hence FTSE on its own would struggle to take on much larger players such as S&P or MSCI,” Virginie O’Shea, a senior analyst at Aite Group in London, wrote in an email. “Combining its assets with Russell, on the other hand, should give it a fighting chance to achieve this in future.”
LSEG has been seeking to diversify beyond its core business of collecting trading fees by acquiring index providers. In 2011, it bought the 50 percent it didn’t already own of FTSE International, which produces the FTSE 100 Index.
“This is a strong strategic acquisition for the group, which creates a highly valuable leading indices business with significant growth potential,” Xavier Rolet, LSEG’s chief executive officer, said on a call with journalists Thursday. “It will accelerate the group’s global expansion, especially in the all-important U.S. market, while delivering financial benefits for the group.”
The London Stock Exchange Group traces its history back to 1801. It employs about 2,800 people worldwide and owns the eponymous stock exchange, one of the world’s oldest.
The transaction still needs to undergo approval by shareholders and regulators.
Information from Bloomberg News is included in this report. Ángel González: 206-464-2250 or firstname.lastname@example.org.