The Abrdn (LSE: ABDN) share price hasn’t had a great 12 months. It’s now fallen by 14% over one year as I write today. But really, the share price has stagnated since the end of 2018. The stock also had a rather volatile time during 2020 as the pandemic unfolded, so investors haven’t had much to cheer about.
But is this set to change? I say this because the company announced a large acquisition this month. The signs are that it’s a top quality business too.
Here’s what I think about the prospects for the Abrdn share price now.
The acquisition
On 2 December, Abrdn announced that it was acquiring Interactive Investor for £1.49bn. Previously, Interactive Investor was a private company, so investors couldn’t buy the shares on a stock exchange.
Interactive Investor is a subscription-based investment platform. Its competitors include other listed companies, such as Hargreaves Lansdown and AJ Bell. I view these companies as high quality because they achieve impressive returns on capital. Both are highly cash generative too, and require little in the way of cash investment to maintain the businesses.
Unfortunately, as Interactive Investor is a private company, the amount of publicly available data is sparse. Nevertheless, knowing about Hargreaves Lansdown and AJ Bell meant I had a fair idea of the potential quality of the acquisition here.
Indeed, Abrdn said Interactive Investor has over 400,000 customers who invest around £55bn via its platform. Furthermore, its operating margin was said to have improved from 23% to 34% between 2018 and 2020.
What’s even better about this acquisition is that it’s expected to be double-digit earnings enhancing in its first full year after completion. This is a positive sign in my view.
Abrdn’s other businesses
If I were to buy Abrdn shares, I’d have to be comfortable with its other businesses. The company offers a range of investment solutions across asset management, investment platform technologies and financial planning. As it stands, Abrdn manages and administers £532bn of assets for its clients. This is impressive scale, and means the company can generate significant profits on its asset base.
However, City analysts are forecasting net profit to decline by 28% this year. And in 2022, net profit is expected to rebound by only 7%. This isn’t great, so Abrdn’s management maybe views the acquisition of Interactive Investor as a way to boost growth.
Are Abrdn shares a buy?
I think the acquisition here is a good move for Abrdn. Interactive Investor shows signs of being a quality company. The fact that it should be earnings accretive in the first full year suggests it’s good deal for Abrdn too.
However, acquisitions can go wrong if they aren’t integrated well. There’s some risk mitigation here, though, as Interactive Investor’s current CEO will continue to lead the business. It will also operate as a standalone company within Abrdn, so there should be little disruption.
I’m going to see how the acquisition is integrated before I buy Abrdn shares. I think there are better options for my portfolio right now.
Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
