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Why Shares of Oaktree Capital Surged Higher Wednesday

By Lou Whiteman – Updated Apr 12, 2019 at 9:04PM

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Two prominent asset management businesses are joining forces.

What happened

Shares of Oaktree Capital Group (OAK) climbed 12% on Wednesday morning after Brookfield Asset Management (BN -1.23%) announced a $4.8 billion deal to acquire a majority stake in Oaktree, creating an entity with $475 billion of assets under management and $2.5 billion in annual fee-related revenue.

So what

The terms of the deal give Oaktree shareholders the choice of receiving either $49 in cash or 1.0770 class A shares of Brookfield for each share held. The cash offer is a premium of about 12% over Oaktree's Tuesday closing price.

The deal combines two of the leading names in asset management, an industry that tends to do well in a bull market but face issues when there is market turbulence. Oaktree's fourth-quarter results reflect the broader market tumble in late 2018, with adjusted revenue down 11% and adjusted net income down by one-third.

Check out the latest earnings call transcript for Oaktree Capital Group.

Hand-stacked coin piles growing larger.

Image source: Getty Images.

Post-deal, both Brookfield and Oaktree will continue to operate their businesses independently and led by existing management and investment teams, partnering when appropriate. At close, Brookfield will own about 62% of the Oaktree business, with Oaktree founders and certain other employees owning the remaining 38%.

Brookfield also has the right to match any unsolicited superior proposal Oaktree might receive, and the agreement provides for the payment by Oaktree of a $225 million fee if the agreement is terminated under certain circumstances.

Now what

The deal structure allows investors with shorter time horizons who might fear continued market volatility a chance to cash out at a premium, or those with a longer-term view a stake in a premier asset management firm.

That's a tough choice best made based on individual circumstances. But given the outstanding long-term track records of both Oaktree and Brookfield, the combination is likely to be a powerhouse in the asset management business for years to come.

Lou Whiteman owns shares of Oaktree Capital. The Motley Fool owns shares of and recommends Oaktree Capital. The Motley Fool owns shares of Brookfield Asset Management. The Motley Fool has a disclosure policy.

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