The big story of the last few days within the asset management space has been Invesco’s takeover of Guggenheims ETF business for a reported $1.2 billion. Given that Guggenheim only has around $30 billion in assets within its ETF business, at first glance this seems a rather hefty price although the Financial Times did further report that “Invesco is paying 12 times the estimated 2018 earnings before interest, tax, depreciation and amortisation of the ETF business, according to a person directly familiar with the transaction terms — a price analysts at Jefferies described in a research note as ‘not cheap but not expensive’.”

Dig around in the numbers though and on a backward-looking basis the numbers do look a tad extreme I would suggest.

Take Guggenheim’s most successful product, the $14 billion behemoth that is its S&P 500 Equal weight index ETF on a TER of 0.20%, which implies an annual revenue run rate of $28m for just one product. Isn’t Invesco taking huge concentration risk on just one ETF!

But my hunch is that Invesco also took a shine to the Bulletshares fixed income product range – fixed income is, in my view, THE big growth area and the BulletShares range is hugely innovative. By my calculation these eight funds in total have clocked up over $2.8 billion in assets and produce revenues of at least $10m per annum. I can absolutely see how this smart range of fixed income ETFs could easily see AuM hit $30 billion in just a few years, not just a few billion – especially using Invesco’s huge distribution muscle in retail.

Also as David Tuckwell in ETF Stream rightly points out, Invesco is buying into a high margin business in the all important smart beta space – another huge growth market. Margins for these products can be as high as 80% which makes the Guggenheim range hugely valuable.

Yet despite all this talk of high margins, there’s no getting away from those oft mentioned M and A multiples. A few years ago, for instance BlackRock iShares swooped on the European ETF business of Credit Suisse and (probably) paid between $200 to $300m for a $17.6 billion book of business. Invesco also recently bought European manager source ETFs, with $18 billion of assets plus another $7 billion in externally managed AuM. Various reports at the time put the price of this deal at $500m but subsequent rumours in the market put the number closer to $250m.

But I would cite the mother of all ETF deals as one reason why Invesco might not have overpaid – BlackRocks purchase of iShares back in 2009. At the time I like many thought that this deal represented an astonishing price for a low margin passive business.

Just to refresh our collective memory BlackRock grabbed the BGI business (which included iShares) at the last minute for a total of $13.5 billion which included $6.6 billion cash and shares – the deal in turn made Barclays one of the largest shareholders in BlackRock with a near 20% stake. Obviously, the headline assets run by BGI looked huge – at $2.7 trillion. But in reality, much of the BGI business was in very low margin institutional products whereas iShares had “only” $300 billion of assets at the time.

My hunch is that any deal specialist would have looked at those numbers and suggested that a large part of the total purchase price was actually for the iShares franchise – my guess is close to 50% of the total sum paid. On that basis one could easily mount the argument that BlackRock paid something between $5 and $8 billion in effect to buy the iShares business, implying between 1.5 and 3% of the AuM in the retail index tracking business (iShares AuM at the time was $300 bn – now its $1.65 trn).

One’s first reaction at the time was to say that was a bonkers number but in retrospect a different story has emerged. I would now go so far as to say that the iShares deal by BlackRock was close to being the deal of the decade, maybe even the century, in asset management.

If you want to understand the background behind this outlandish statement take a look at the third quarter numbers from BlackRock, iShares parent business. The iShares unit is now churning out fees of over $1 billion per quarter – that number has been steadily increasing towards the ten figure level over the last year, with the Q4 2016 number at $883 million. My guess is that in 2018, the iShares will be producing over $ 4 billion in revenues on an annualised basis. The net operating margins per product type aren’t broken out but overall BlackRock has a 43% operating margin with the active funds obviously kicking in the greater share. My guesstimate again would be that the retail ETFs business is running at a 25 to 30% operating margin which implies a 2018 profit run rate at around $1 billion.

iShares has become such an integral part of the BlackRock proposition not because it’s terrifically high margin (though it does boast a higher margin that the core BGI institutional business) but because its playing a growth vector – one we all know about. In one deal BlackRock effectively bought a huge beta on the growth of passive funds. Equally its deal buying the Credit Suisse business bought it a brilliant beta play on European ETFs.

Thus, transformational deals shouldn’t necessarily be seen through the prism of backward looking numbers – which will always make a deal look insanely expensive. Rather we need to look forward and see how a deal will achieve two requirements. The first is to have sufficient scale to be either Number 1 or Number 2 in huge market segments. Invesco’s recent slew of deals will indisputably help it keep up with State Street, Vanguard and iShares. My hunch is that there’s only really room for 2 to 3 players at the mass market scale and the battle now is to make sure you as an asset manager are in that small pack.

The other requirement is to look at how a deal will boost margin and solidify an issuers hold over a valuable high margin segment or niche – be that alternatives such as commodities or smart beta and fixed income. Again, my hunch is that within five years the amount of assets currently held in a broad universe of smart beta, alternatives and FI will experience huge growth, possibly equivalent to the 5.5 times growth seen in iShares total AuM (from $300b to $1.65 bn). If that is the case then frankly then the Guggenheim ETF deal (and the Source deal for that matter) might look like a reasonable price. There’s a huge battle looming and the ETF scale players need to make sure that they have the right range of products, in the right segments, across all geographies, at the right operating margins…only a few will survive the coming battle!