Strong buyer will have eye on fee income
Assets, not employees, called key lure
By AVRUM D. LANK and PAUL GORES [email protected], Journal Sentinel
Saturday, January 10, 2004
Suitors for Strong Financial Corp.’s mutual fund business are more interested in its $40 billion in assets under management than in its nearly 1,300 employees, experts said Friday.
Banks and insurance companies are among the leading bidders for the Menomonee Falls firm, which was put on the block last year after allegations of improper trading were made against its founder and owner, Richard S. Strong.
Strong Financial will be “squeezed and consolidated into the bigger firm” that buys it, said Roy Weitz, publisher of FundAlarm.com, an online newsletter that offers advice on which mutual funds to sell. “My guess is that the Strong funds would be acquired basically to be merged. All they are looking at Strong for is purely its assets. They are not looking for the name, not looking for the existing funds.”
“I would be surprised if the Strong Funds exist as a name within 24 months,” he said. “I wish I had better news for Milwaukee, but I wouldn’t say it looks good.”
According to The Wall Street Journal and The New York Times, at least seven firms have survived the initial round of bidding for Strong — four banks, two insurance companies and a brokerage firm.
The banking companies are Bank One Corp., Chicago; Wells Fargo & Co., San Francisco; KeyCorp, Cleveland; and Wachovia Corp., Charlotte, N.C. The insurance companies are New York Life and Delaware Investments, part of the Lincoln National Group in Philadelphia. Lehman Brothers of New York is the brokerage.
Prices being offered range from $450 million to $750 million, The Wall Street Journal reported.
Neither Strong, any of the companies mentioned as possible buyers, nor Goldman Sachs Group, which is acting as investment banker in the transaction, would comment on the reports Friday.
Attracted to fees
Russ Kinnel, director of mutual fund research for Morningstar Inc. in Chicago, said that the price range mentioned is less than the 2% of assets at which mutual funds often sell.
“I am not surprised that the banks are interested because banks love fees, and even a place like Strong, where it is unlikely to get big growth in next few years, you can collect those fees. I can see where they would find it attractive,” particularly at the sale prices mentioned, he said.
Both Kinnel and Weitz noted that, except for Lehman, all of the organizations listed as potential buyers run so-called load mutual funds. Those funds carry a sales charge and often are sold through third parties who are paid a commission. Strong, on the other hand, sells mostly no-load funds. These are sold directly by the company without sales charges.
The trend in the mutual fund industry is toward load funds, Weitz said.
For a company that sells mostly load funds to take on a large family of no-load funds and maintain them as such would be an “anti- synergy,” he said.
“I can’t imagine that any load company right now is thinking of revising the no-load trend,” he said. “You need a different orientation when selling no-load fund. You need to have more phone people, more skilled phone people.”
Much of the work now done in-house at Strong or any other no- load company is performed by brokers and other third parties who sell load funds.
For example, Victory Capital Management, owned by KeyCorp, has about 400 employees managing $47 billion in assets, said spokesman Ronald Petrie. Of that, $14 billion is in the Victory Fund group, which sells load funds.
Strong employs 1,275 to manage $40 billion as of the end of November. That included money in 66 mutual funds, only 16 of which charge a load, according to spokesman Drew Wineland. About 1,200 of the Strong employees work on its campus in Menomonee Falls.
Were Strong sold to a company such as Key that specialized in load funds “they would not need (all) the people who work for Strong, that is the logical implication,” Weitz said.
Uncertain future
If Strong were to be sold to an out-of-state buyer, it is hard to say what would happen to the company’s Menomonee Falls headquarters, said Craig Woker, a Morningstar analyst who covers banks.
“Would you continue to have processing operations in the Milwaukee area? Yeah, there’s no real sense in moving that. Would you maybe move your research, your analysts and portfolio management staff somewhere else? I would say that’s a possibility,” Woker said.
Woker said it would make sense for a large bank like Wachovia to buy Strong, especially if the fund company is available at a “fire sale” price as a result of the unfolding scandal over trading practices in the fund industry.
Strong’s problems began in September, when New York Attorney General Eliot Spitzer said the company had allowed a hedge fund to make improper trades. Spitzer later accused Richard Strong of personally profiting from improper trading in his company’s mutual funds.
Strong has said his trading was not disruptive to the funds, and Spitzer has not filed criminal or civil charges against him or the company. But with investors pulling money out of Strong funds, Strong resigned Dec. 2 as chairman and chief executive officer.
A longtime friend of Richard Strong, Minneapolis investment banker Kenneth J. Wessels, was hired to replace Strong. Some analysts have said they believe Wessels was brought in to help sell the company, in which Richard Strong owns a 90% stake.
One of the suitors, Bank One, has had its own run-in with Spitzer. On the same day he alleged Strong had allowed a hedge fund to make rapid buy-and-sell trades in its funds, Spitzer accused Bank One’s One Group mutual fund division of the same thing.
Some industry analysts have praised Bank One for quickly dealing with the allegations, including dismissing some executives in its mutual fund unit.
