Sale just one option for Strong
Views on divestiture diverge
By KATHLEEN GALLAGHER AND DAVE UMHOEFER [email protected]
Thursday, December 11, 2003
A Strong Financial Corp. executive left open the possibility that company founder Richard S. Strong might decide not to sell the firm or might sell only part of it.
At a meeting Wednesday of the Milwaukee County Pension Board, F. John Baranko, managing director of Strong’s institutional business at Strong Capital Management, emphasized that a sale is just one of Richard Strong’s options.
“He could ultimately decide not to sell and just retain the ownership of the organization, and not have his influence,” Baranko said.
Baranko was reacting to a comment by Kellie Scheurell, the board’s investment consultant, who said Strong is giving up voting power and will be giving up his financial ownership of the firm. Strong owns about 90% of the firm.
“They are in the process of divesting his ownership fully — that’s what Goldman (Sachs) was retained to do,” said Scheurell, of Mercer Investment Consulting, when Baranko interrupted to correct her.
The board oversees the $1.4 billion Milwaukee County employee pension fund and has been meeting with Strong every month to monitor its $121.5 million fixed-income account with the firm.
The conflicting interpretations are a result of language in Strong’s original announcement that leaves open many possibilities for what form his divestiture will take and how it will be timed. The release said Strong would take steps “to divest himself of voting control of the firm.”
Observers have speculated that potential buyers could range from big banks to big mutual fund companies to a management group at the company.
No charges have been filed against Richard Strong or the firm, but three regulators — the Securities and Exchange Commission, the New York attorney general and the Wisconsin Department of Financial Institutions — are investigating possible improper trading.
Strong, which manages about $40 billion of investor assets, has lost nearly $3 billion since Sept. 3, when New York Attorney General Eliot Spitzer first implicated the firm for giving a New Jersey hedge fund special opportunities to trade in certain Strong funds.
On Oct. 29, Spitzer’s office said it planned to take action against Strong personally, based on allegations of improper short- term trading of his company’s mutual funds.
What is not known is what influence the three regulators investigating Strong might have in determining what happens to the company. Juanita Scarlet, a Spitzer spokeswoman, declined to comment.
The company might be difficult to sell because of the allegations raised against it.
“Obviously they are on the block, but there aren’t many cases where people come in and buy a company in this position,” said Russel J. Kinnel, head of equity research at Morningstar Inc. in Chicago.
“If Strong had gone on the market a year ago, without doubt they would have had no problem attracting some decent bids. But at this point, I don’t know. It may be that most bidders would want a settlement so that the regulatory issues are behind them before they step in.”
Last month, Milwaukee County Pension Board member Charles McDowell helped lead an unsuccessful effort to drop Strong until the regulatory cloud lifted.
The board took no formal action Wednesday after hearing that Strong’s investment performance was keeping pace. The fixed income assets Strong manages for the county are up 3.9% for the year, well ahead of the benchmark they compete against.
“Your portfolio is secure and well represented,” Scheurell said.
Board members expressed concern that a sale of Strong or the addition of a “strategic partner” could break up the team that manages the county’s pension fund.
An ownership change would be a concern if Strong were integrated into another fixed-income company and its investment teams were broken apart, Scheurell said.
If there is no sale, company officials might take on ownership, which could help retain key employees, she said.
Board member Clifford Van Beek asked Baranko about a comment by Don Phillips of Morningstar suggesting that Strong Financial is leaving the door open for Strong’s return if he is exonerated.
“That’s speculation,” Baranko said. “Everything I’ve seen is a complete break.”
Van Beek has strongly urged the board not to dump Strong, noting its good performance, local ties and fears that a pullout could help destroy the company.
Pension Board Chairman Walter Lanier asked that Kenneth J. Wessels, who is replacing Strong as chairman and chief executive, report to the Pension Board at its next meeting.
Paul Gores of the Journal Sentinel staff contributed to this report.
