After the Aberdeen-Standard tie-up, could these asset managers be in play?

It’s fair to say that today’s news regarding the merger between Standard Life and Aberdeen Asset Management is a surprise but not wholly unexpected. 

Aberdeen has been struggling in recent months as outflows from the fund manager’s actively managed investment funds have accelerated. To counter this trend the group has been cutting costs, but there’s only so much fat any one company can lose. At the same time, Standard Life has undergone a transition from a traditional insurer to more of an asset management company. By combining, the two will be able to cut costs faster and offer existing clients a broader range of products.

More deals to come? 

This is unlikely to be the last of these buy-to-shrink deals. As asset managers around the world come under pressure from low cost alternatives, consolidation is widely believed to be the only option left for survival.

Charles Stanley (LSE: CAY) and Hargreaves Lansdown (LSE: HL) are two prime consolidation candidates for different reasons.

Charles Stanley is one of the City’s oldest wealth managers but in recent years the company has come under pressure from the rise of low-cost online brokers. This shift has prompted management to reorganise the business into a bespoke wealth manager, which has reversed the sales decline. 

The City expects the company to report pre-tax profits of £7.6m for the year ending 31 March 2017, rising to £13.2m for the year after. If the company hits City growth targets, earnings per share are expected to grow by nearly 140% over the next two years.

This growth could attract a suitor looking to take advantage of Charles Stanley’s position in the City and leverage its physical presence to expand. With a market capitalisation of only £160m, the firm is relatively small compared to other wealth managers such as Hargreaves Lansdown (£6.3bn) and could be an easy snack for a much larger peer that is looking to expand into the high net worth wealth management business.

Wide margins 

Hargreaves Lansdown is one of the low-cost online brokers giving Charles Stanley a hard time and for this reason, the company could become a takeover target itself.

Its most attractive quality is the company’s hefty profit margin which stands head and shoulders above the wider industry average. 

Specifically, according to the Office for National Statistics, profit margins for non-financial companies are about 12%. Hargreaves Lansdown booked a profit margin of more than 70% in its last results release. On revenue of £185m the company made a profit of £131m. With such hefty margins it’s easy to see why the firm’s market capitalisation eclipses that of Charles Stanley. Shares in the firm currently trade at a forward P/E of 30.6 and earnings per share are expected to grow 14% this year. 

If Hargreaves Lansdown is already reporting a profit margin north of 70%, potential acquirers must be wondering how lucrative the business will be when synergies from any potential merger are realised. Buying the business may be a no-brainer decision.

Don't rush into buying

Even though Charles Stanley and Hargreaves Landsdown might look like excellent acquisition targets, you should never buy a stock just because it could be a potential takeover play. Doing so might cost you more than you could make as it is widely considered one of the worst mistakes investors make. 

To help you avoid similar errors, the Motley Fool has put together this new free report.

The report is a collection of Foolish wisdom, which should help you avoid needlessly losing too many more profits. It also contains tips to help you get the most out of your portfolio. Click here to download today. 

Rupert Hargreaves owns shares of Standard Life. The Motley Fool UK has recommended Hargreaves Lansdown. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.