The Ramifications of a Proposed Mega-Merger
Franklin Resource’s proposed $913-million acquisition of the Templeton group would rank as the largest merger in mutual fund history, but shareholders of the two fund families would be hard-pressed to notice immediate changes.
“Although there are opportunities for cross-fertilization, we intend to run both organizations autonomously,” says Charles E. Johnson, Franklin’s senior vice president.
The union, subject to a vote of both companies’ shareholders, isn’t likely to be completed before November.
If the acquisition is approved, Templeton would operate as an independent subsidiary of Franklin, keeping its own portfolio managers and senior management team, and maintaining a separate policy on loads or commissions.
“One reason we did this merger is that the two organizations are so complementary and have so little overlap,” says Johnson.
The acquisition appears to secure a future course for Templeton, Galbraith & Hansberger of the Bahamas and its Templeton Funds subsidiary, based in St. Petersburg, Fla.
The group’s founder and chairman, John Templeton, was a pioneer in global investing and remains one of the most recognizable and respected names in the business.
There ia a need for the 79-year-old to stay on to assure investors about the company’s future. After the merger, Templeton will serve as chairman of all Templeton funds and as an investment adviser and consultant to senior management.
The business interests of Templeton, Galbraith & Hansberger, including its U.S. mutual funds, will be transferred to a new entity, Templeton International, which will be headquartered in Ft. Lauderdale, Fla.
The proposed union combines two successful yet very different firms.
Going into the merger, Franklin ranked among the five largest fund companies, with $61.3 billion under management (plus $5.2 in non-fund managed assets).
The acquisition will make Franklin, whose shares trade on the New York Stock Exchange, the largest publicly held, non-brokerage fund company, leapfrogging Dreyfus Corp.
Franklin’s strength is in fixed-income funds, including many varieties of tax-free portfolios. Of the $66.5 billion that the company manages, 87% is in bond or money-market products, 13% in stock portfolios.
Only 23 years old, Franklin vaulted to a top position on the strength of innovative products, aggressive marketing and reliable shareholder service.
By contrast, the Templeton group’s forte is in global stock market investing. Of the firm’s $21.3 billion under management, 80% is on the equity side, compared to 20% in the fixed-income arena.
Templeton, Galbraith & Hansberger has offices in 10 nations, but its U.S. mutual funds account for slightly more than half of all assets--about $11.1 billion.
The international exposure was an “absolutely critical” attraction from Franklin’s perspective, says Johnson. “Our view is that you have to be global to be competitive.”
Founded in 1940, Templeton is a much older concern but, as noted, it has a smaller asset base.
“Templeton’s marketing activities have been under-managed, while Franklin is a marketing powerhouse in the U.S.,” according to Putnam Lovell, a Manhattan Beach investment-banking firm that specializes in mutual fund mergers and acquisitions.
Putnam Lovell predicts that the Franklin-Templeton union will enhance the latter’s ability to compete in the increasingly crowded field of global investing. And with little product overlap, there will be opportunity for “cross-selling” to shareholders in both groups.
“Despite possible operational or cultural problems as these companies are merged, the long-term benefits should be immense,” according to Putnam Lovell.
Still, it remains to be seen how Templeton fund investors will react to the acquisition and John Templeton’s reduced role.
Four of Templeton’s five U.S. mutual funds with five-year track records have beaten their peers over that span, and shareholders will no doubt continue to expect superior performance.
Prospective investors might be discouraged to learn that loads on the Templeton funds won’t likely drop to Franklin’s levels. Commissions on the Templeton products, which for years had run at 8.5%, last month were lowered to 5.75%.
But that’s still above the top 4% charged on most Franklin funds.
According to Johnson, there are no plans to initiate the same-sized loads for both groups.
On the other hand, Templeton isn’t likely to adopt Franklin’s unusual practice of charging commissions on reinvested dividends.
One place investors might see some benefits is in the area of commission “break points,” which are volume discounts for people who invest relatively large sums.
For example, a Templeton investor currently pays a 5.75% commission on purchases below $50,000, but 4.5% or less if investing more than that. With a Franklin fund, a person has to invest at least $100,000 to hit the first break point.
According to Johnson, combined purchases of both Templeton and Franklin funds could eventually qualify for a break point discount. “The directors of each fund would have to approve this type of change, but to me it makes sense.”
It might also eventually be possible to switch among funds in the two groups without paying additional commissions, he says.
Largest Fund Companies
Franklin’s proposed purchase of Templeton would move the company up one notch from fifth place to fourth. These rankings include only mutual fund assets under management--not other managed assets--as of June 30, 1992.
Pre-Merger Top 10: Assets (billions)
1. Fidelity: $154.2
2. Merrill Lynch: $98.7
3. Vanguard: $77.5
4. Dreyfus: $70.8
5. Franklin: $61.3
6. Capital Research
(American Funds): $57.4
7. Dean Witter: $45.5
8. Kemper: $43.1
9. Federated: $43.0
10. Shearson Lehman Bros./
Boston Co.: $42.3
Post-Merger Top 10: Assets (billions)
1. Fidelity: $154.2
2. Merrill Lynch: $98.7
3. Vanguard: $77.5
4. Franklin (with Templeton): $72.4
5. Dreyfus: $70.8
6. Capital Research
(American Funds): $57.4
7. Dean Witter: $45.5
8. Kemper: $43.1
9. Federated: $43.0
10. Shearson Lehman Bros./
Boston Co.: $42.3
Source: Lipper Analytical Services
