Man acquires rival hedge fund manager FRM The Man Group, the world's second-largest hedge fund manager by assets under management, is to acquire $8bn rival FRM, almost exactly two years after its landmark buyout of GLG Partners. The deal will shore up Man's asset base, which has suffered from outflows and poor performance in the past 18 months. Following the acquisition, group assets will stand at over $67bn. While Man paid $1.6bn for GLG in 2010, FRM, a fund of hedge funds, has been scooped up by the group for a maximum consideration of just $142m - a figure that is dependent on asset retention in the coming months. FRM, one of the fund of hedge fund industry's best-known names in its own right, will be integrated into Man's existing $11bn fund of hedge fund business, run by Luke Ellis, the company said Monday. The combined group will retain the FRM brand. The deal will help to further reduce Man's dependence on its flagship fund, AHL, which accounts for about $20bn of group assets. AHL, which uses complex computer models to automatically spot and ride market trends has underperformed for the past two years, dragging Man's share price down with it. Analysts and shareholders welcomed the deal. Shares in Man Group rose more than 6 per cent to 79.95p - the biggest one-day rise achieved by the group in months. I agree with Man's assertion that the deal will generate double accretion to management fee EPS in 2013. My calculations show the accretion in excess of 20 per cent," said Peter Lenardos, director diversified financials at RBC. "The deal's structure and pricing begs the question: why would FRM sell for 1 per cent of AUM when they are generating a management fee margin of 110bps and why there is no upfront consideration?" he added. It is either an incredible deal for Man or the assets are not high-quality. I have to admit, it seems like the former and Man got a great deal. Under the complex terms of the transaction, FRM's private shareholders will receive a series of contingent payouts in the next three years linked to group performance. After one year, a payment of up to $47.5m will be made, followed by a further $66.5m after three years. In addition, FRM shareholders will be entitled to receive up to 47.5 per cent of management fees from the company's existing $8bn investor base in the next three years, capped at $60.8m. After accounting discounts applied by Man, the total cash cost of the deal is booked at just over $82m by the company. "The deal works at two different levels," said Mr Ellis, who before joining Man was a managing director of FRM for 10 years. The first is as a financial transaction. For Man shareholders it is a deal that has been structured carefully so risk is minimised and there is lots of upside. Second, the deal works in terms of what it brings to clients on both sides. The reaction so far from clients of both businesses has been "positive" said Mr Ellis, who is in Japan. Sumitomo Mitsui Trust Bank advises about half of FRM's investor base and has welcomed the deal, said Mr Ellis. The deal will drive down costs and allow FRM to focus on clients rather than worrying about its ongoing business by virtue of the "capital strength" of Man's balance sheet, Mr Ellis said. "The beauty here is that people have been very realistic," he added, when asked about the pricing and execution of the deal.