Timing Is Everything : For GE, the Moment Appears Right to Dive Into a Mutual Fund
America is aging, retirement savings are growing, and the result is an investment boom that has enticed one of the world’s largest finance companies into making an aggressive bid for one of the country’s leading mutual-fund firms.
General Electric Capital Services’ bid of $2.2 billion, or $55 per share, for Kemper Corp. demonstrates GE’s conviction that the mutual fund industry will continue to be as much a growth industry over the coming years as it has been over the last decade, analysts say.
Kemper, the nation’s ninth-largest mutual fund company, also would put GE Capital into a one of the few sectors of the finance world where it does not have a strong position: individual asset management. As General Electric Chairman John F. Welch wrote to Kemper Chairman and Chief Executive Officer David B. Mathis on March 2, “Kemper would be the flagship of our major thrust in the asset management business.”
Nevertheless, the Kemper board and Mathis--who has won widespread praise for his restructuring of the company--rejected the bid last Friday. So far, they have refused even to discuss it further with GE representatives, according to spokesmen for both sides.
“Our position is that this is a low-ball bid and they’re attempting to steal the company,” Steven Radis, a Kemper spokesman, said Wednesday.
GE has requested a list of Kemper shareholders, which it is entitled to receive, and has retained a proxy-solicitation firm to help present its offer directly to owners of Kemper stock. GE also has hinted that it might propose its own slate of directors at Kemper’s annual meeting in May, during which four of the 11 board members--including Mathis--are up for election.
The bid comes against an expectation of continued growth in the mutual fund industry, where assets under management in stock and bond funds alone have more than sextupled to $1.4 trillion from $220 billion in 1985.
“You have an aging population, low interest rates, and a need for retirement funding,” observed James P. Hanbury, an analyst at Wertheim Schroder Securities in New York. “And there are only 15 to 20 brand names in the (mutual-fund) business.”
Among those, Kemper is one of the few publicly held mutual fund operations. With $30 billion under management in its 40 equity and bond funds, the company is an inviting target for a buyer such as GE seeking to swiftly reach a critical mass in the field.
Starting a mutual-fund business from scratch is particularly difficult, industry experts say, because many investors judge funds by comparing their five-year records. That places funds with shorter life spans at a competitive disadvantage.
“This business takes time to build,” said John Rekenthaler of Morningstar Mutual Funds, the Chicago-based fund-rating service. “You just don’t raise $30 billion in three to four years.”
In those terms, GE’s bid resembles at least one other recent mutual-fund deal--the 1992 acquisition of Templeton Funds by Franklin Resources. That $913-million transaction gave Franklin a foothold in the international-fund sector, where it was otherwise weak.
Indeed, a GE-Kemper deal would make a lot of sense, many analysts say.
GE Capital is one of the country’s most successful and aggressive financial companies. Created in the 1930s to help Depression-strapped consumers finance their purchases of refrigerators and other General Electric appliances, it has grown into an institution that resembles a full-service bank and investment company--but is exempt from most conventional banking regulations.
GE Capital finances auto, truck, airplane, and computer leases; issues credit cards and provides other consumer financing; puts up money for merger deals; sells insurance, and brokers stock and bond transactions.
“They’re probably the most profitable bank in the world,” said Nicholas Heyman, an analyst for NatWest Securities.
GE Capital’s Kidder, Peabody unit could absorb Kemper’s securities brokerage arm--the product of a series of purchases of small regional brokerages in the early 1980s, including Bateman Eichler, Hill Richards of Los Angeles. From 1987 through 1992, that strategy generated $223 million in losses for Kemper, which has never made the securities unit a success.
Some observers also say GE’s army of expert real estate executives may be able to squeeze more out of Kemper’s burdensome portfolio of nonperforming real estate than Kemper has thus far. Over the last three years, Kemper has written down the properties to about 18% of their invested values, charging nearly $800 million against profits.
That has drawn raves from analysts tracking Kemper’s long restructuring.
“We think that the significant deterioration of Kemper’s real estate portfolio has finally ended, and we believe that the reported losses will decline,” wrote Merrill Lynch analyst Allen Nadler in placing a buy recommendation on the stock last February.
But the Kemper management’s success in streamlining the company may have hardened its stance against a GE takeover. “They’ve done so much of the hard work already,” said Keefe, “and along comes GE.”
Still, few expect Kemper will be able to remain independent. Many analysts expect the firm to capitulate if GE raises its bid to the $65 range, although Nadler has valued the entire company “conservatively” at about the $55 GE already has offered.
“Kemper hasn’t given a reasonable case for saying it’s a low-ball offer,” remarked Heyman of NatWest, noting that no counter-bidder has emerged in the nine days since GE made its offer public.
“Time is Kemper’s worst enemy,” he said. “If there was another bidder, it would have surfaced by now.”
GE Capital Guns for Kemper
Created during the Depression to help consumers finance purchases of General Electric appliances, GE Capital today is one of the world’s largest non-bank finance companies. In promoting GE’s bid for Kemper Corp., Chairman John F. Welch said the Chicago-based insurance and mutual fund company would be the “flagship” of GE’s move into the asset management business.
GE CAPITAL AT-A-GLANCE
Headquarters: Stamford, Ct.
Employees: 33,000
Main businesses:
* Specialty insurance
* Consumer financing and services (including auto and retail financing)
* Specialized financing (including Kidder, Peabody brokerage)
* Equipment management (including leasing of aircraft, trucks, computers and shipping containers)
GE’S FINANCIAL ENGINE
GE Capital is one of the parent company’s fastest-growing units, contributing a steadily rising share to overall net earnings.
GE Capital Earnings (millions of dollars): 1989: $927 90: 1,090 91: 1,270 92: 1,490 93: 1,810
GE 1993 Operating Profit by Segment: GE Capital: 27.6 Power systems: 11.9 Materials: 8.7 Aircraft engines: 8.3 Industrial: 8.2 Other: 35.3
OPPORTUNITY MISSED?
Kemper Corp., the object of GE’s unsolicited bid, has a complicated history. Lumbermens Mutual Casualty Co., its corporate cousin, may have squandered a big share of takeover booty by swapping some holdings with Kemper Corp. last year. A family history:
1912: James S. Kemper forms company to insure Chicago lumberyard workers. Later becomes known as Lumbermens Mutual.
1968: Company splits in two. Kemper Corp. is publicly traded. The rest of the business becomes Lumbermens and several other mutual insurance companies, owned by their customers. Eventually, these all fall under the rubric of Kemper National Insurance Cos., of which Lumbermens is the largest. Lumbermens owns about 50% of Kemper Corp.’s stock. Kemper Corp. and Kemper National share the same executives and directors.
1990: Kemper Corp. and Kemper National evolve into completely separate entities, with different managements and separate boards--although some board members continue to serve on both. Kemper National continues to own about 40% of Kemper Corp.’s stock.
August, 1993: Kemper National gives up all but a small portion of its Kemper Corp. stock. It gives 17.4 million shares, worth $593.8 million, to Kemper Corp., lowering its stake to about 4%. In exchange, Lumbermens gets ownership of Kemper Reinsurance and a risk management operation.
March 23, 1994: Value of 17.4 million Kemper Corp. shares at Wednesday’s closing price of $60.875: $1.059 billion.
Source: Standard and Poor’s; GE
