UPDATE 5 – Edinburgh-based Standard Life has agreed to buy Aberdeen Asset Management for £3.8 billion in an all-share transaction that would create a global fund management player overseeing £660 billion ($810 billion) of assets.

The combined group, which would be the largest asset manager in the UK and the second largest in Europe, would be branded to incorporate the names of both Standard Life and Aberdeen.

“The products and distribution are complementary and with an assets under management of £660 billion, the deal will catapult the combined entity well ahead of the likes of Schroders or M&G to create a regional asset management powerhouse and globally relevant player,” said Mike Clements, head of European equities at SYZ Asset Management.

Standard Life CEO Keith Skeoch has successfully moved the firm’s focus from traditional life insurance to asset management in recent years, while Aberdeen grew aggressively with a focus on emerging markets under co-founder and CEO Martin Gilbert — but it has recently suffered significant fund outflows.

Skeoch and Gilbert would become co-CEOs of the combined group — an arrangement some shareholders are not happy with. 

It was not immediately clear how many jobs would be put at risk from a merger deal that seeks to make cost savings of up to £200 million a year.

The companies expect cost synergies from consolidating operating and trading platforms, eliminating overlap in distribution, and rationalising central functions and property portfolios.

According to Bloomberg data, Standard Life employs around 8,300 people and Aberdeen has about 2,800 staff.

Following completion of the agreed merger, Standard Life shareholders would own 66.7% and Aberdeen shareholders would own 33.3% of the combined group.

Mitsubishi UFJ Trust and Banking and Lloyds Banking Group — Aberdeen’s two largest shareholders controlling a combined 27% of the firm’s shares — both gave non-binding statements of support for the deal.

Some analysts said this support for the deal made it unlikely a new bidder for Aberdeen would emerge, but others said that a rival offer remained a possibility.

Aberdeen shareholders would receive 0.757 new Standard Life ordinary shares for each Aberdeen ordinary share.

The merger agreement valued Aberdeen shares at 286.5p — a 0.10p premium to its closing price of 286.4p on Friday — and Aberdeen’s existing share capital at £3.8 billion.

The shares of both companies rose about 5% on news of the deal, with analysts focusing on the potential cost synergies of the merger.

The market share of so-called “active” stock-picking fund management firms like Standard Life and Aberdeen has come under pressure from the rise of “passive” asset management firms that specialise in providing much cheaper index-tracking funds.

SYZ’s Clements said: “The relentless rise of ETFs (passive exchange traded funds), persistent fee pressure, struggling fund performance, rising regulatory and compliance costs and higher capital requirements are making life tough for stand-alone and sub-scale asset managers.

“The need for scale has never been more apparent in a sector which is dominated by a few global giants, but has an incredibly long tail of smaller players.

“Finding the right partner and coupling up seems to be the strategy pursued by many management teams.”

Standard Life chairman Gerry Grimstone would become chairman of the combined group, Bill Rattray of Aberdeen would become chief financial officer and Rod Paris of Standard Life would become chief investment officer.

Skeoch said: “We have always been clear that it is Standard Life’s ambition to become a world-class investment company and that this would be achieved through continued investment in diversification and growth, coupled with a sharp focus on financial discipline.

“We are therefore delighted that this announcement marks another important step towards achieving that ambition.

“The combination of our businesses will create a formidable player in the active asset management industry globally.

“We strongly believe that we can build on the strength of the existing Standard Life business by combining with Aberdeen to create one of the largest active investment managers in the world and deliver significant value for all of our stakeholders.”

Gilbert said: “We believe this merger is excellent for our clients, bringing together the strong and highly complementary investment capabilities of each firm with a breadth and depth of talent unrivalled amongst UK active managers and positioning the business to meet the evolving needs of clients and customers.

“This merger brings financial strength, diversity of customer base and global reach to ensure that the enlarged business can compete effectively on the global stage.”

Aberdeen has suffered outflows from its funds for many months, and Aberdeen shareholders now had a “a Hobson’s choice” where they had to “accept a nil-premium takeover or risk a material dividend cut, possibly as soon as the interim results in May, due to the weak capital situation,” wrote Paul McGinnis, analyst at Shore Capital Group.

SYZ’s Clements added: “It is no secret that Aberdeen, itself a product of acquisitions, has been in the market for another game-changing deal.

“Speculation has been rife that it is either a target for a larger firm or it is on the lookout for a deal for itself.

“Martin Gilbert, Aberdeen’s well-known CEO, acknowledged that the Janus Henderson tie up was a smart deal and that he was on the lookout for something similar.

“He briefly had a look at Pioneer’s US business, but unable to compete with Amundi’s firepower, dropped out of the running.

“After presumably having scoured the market for US-centric opportunities, Aberdeen has found what looks to be a great deal on its own doorstep.

“The cost synergies are clear given the operational and geographic overlaps.