Pimco in Talks to Merge With German Giant
Pimco Advisors Holdings, the nation’s largest bond-fund manager, is in talks with one of Europe’s largest insurers about selling all or part of the Newport Beach company to greatly expand its presence overseas.
Pimco, which manages about $250 billion for corporate and individual clients, has held preliminary talks with German insurance giant Allianz, industry sources said. Executives of both companies declined to comment Wednesday.
A sale of Pimco could bring as much as $5 billion--nearly five times the company’s book value. It would mean a big boost for the net worth of many of the company’s executives; insiders now own about 22% of Pimco’s limited-partnership units.
The talks between the two companies signal larger trends in the rapidly maturing asset-management industry. First, there is a perceived need to get bigger to stand out in an ever more crowded mutual fund market. Over the last 29 months, there have been at least 49 mergers among asset-management firms, according to Barrington Research analyst Alexander Paris Jr.
Second, many U.S. money managers are eager to take their financial products into largely untapped foreign markets, which are viewed as major growth opportunities.
“Europe is particularly seeing some fundamental changes in its retirement savings markets,” noted Morgan Stanley analyst Henry McVey. The Continent appears to be headed toward a private retirement savings system modeled on the U.S. 401(k).
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Pimco is a holding company for five firms that together manage investments in 50 bond and stock mutual funds. Its clients include about 1,600 corporations, government agencies and institutions, including many of the largest corporations in the U.S. These institutional investors account for 64% of the funds Pimco manages--with most of the money coming from their employee pension programs. The remainder comes from individual investors, who can purchase shares of Pimco mutual funds through brokerage houses.
Pimco has long sought a greater presence in the lucrative European and Asian markets, industry analysts said, and sees a combination with a well-known firm like Allianz as the fastest way to open up overseas distribution channels.
“Distribution is key,” said Scott Weiner, who heads Metzler/Payden, a joint venture between the Los Angeles-based money manager Payden & Rygel and Metzler Bank of Germany.
One of the reasons Payden & Rygel partnered with Metzler last year was to tap its established sales force, Weiner said. “That gives you instant entree into Germany, which in turn gives you entree into the rest of Europe,” he said.
Pension assets total almost $1.5 trillion in the Pacific Rim nations and are expected to soar to $2.3 trillion over the next four years. European pension assets, now pegged at $2.7 trillion, are expected to increase by 44% to $3.9 trillion in the same period. Yet only about $14 billion of the assets managed by Pimco come from overseas sources, analysts said.
Any transaction would require approval from Pimco’s senior management, including bond fund manager William H. Gross--an industry superstar whose name would add luster to products Allianz wanted to sell in the U.S. or overseas.
“Pimco Total Return fund, which Gross manages, is clearly the flagship product for the whole company,” said Guy Moszkowski, an analyst at Salomon Smith Barney.
The fund attracted almost $4 billion in the first five months of this year, making it the fourth-best-selling fund in America and boosting its assets to $27 billion, according to Financial Research Corp., which tracks fund flows.
Pimco Total Return has gained at an annual rate of 8.5% over the last five years, exceeding the average 7.8% annual return of rival income funds, according to Bloomberg Fund Performance.
Pimco’s limited-partnership units rose 14.6%, or $4.31, to $33.88, in heavy New York Stock Exchange trading on word of the potential sale Wednesday. The gain was the biggest jump for the units since they began trading when Pimco was spun off from Pacific Life Insurance Co. in November 1994. Allianz shares, which trade on the Frankfurt Stock Exchange, rose $2.55 to $299.40.
Pimco’s units could fetch about $45 each if the entire firm were sold, analysts said.
“Pimco has said it would be open to a sale or merger if the price were right,” said Luke Fichthorn, an analyst with Lazard Freres & Co. in New York. “One of its frustrations is that its units trade at a discount because a large number of mutual funds and pension funds can’t own them for tax and other reasons.”
The 44% of the company’s units that are publicly held typically trade based solely on the current yield from dividends. “And that’s not a good indicator of long-term outlook,” Fichthorn said.
While Pimco’s bond management talents are well known, its stock funds have been struggling as performance at its Oppenheimer Capital and Columbus Circle units have lagged, said Paul Becht, director of research at Crawford Investment Counsel, an Atlanta-based money manager that owns about 525,000 Pimco units.
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In fact, Pimco has been refocusing its business and last week sold the Columbus Circle Investors Inc. unit to the firm’s executives to concentrate on its two biggest units, Pacific Investment Management, which has $165 billion worth of assets, all in bond funds; and Oppenheimer Capital, with $60 billion in assets invested in stock mutual funds.
Stock funds are a faster-growing part of the overall U.S. mutual fund business, attracting more than three times the money of bond funds this year.
But almost two-thirds of Pimco’s assets under management are invested in fixed-income securities.
“Pimco’s stock fund business isn’t growing as rapidly as the bond fund business, and getting a global geographic reach would help,” said Ben Wei, an analyst at Crowell, Weedon & Co. in Los Angeles.
It isn’t clear whether Allianz is considering purchasing the entire company, the 22% stake held by insiders or the 33% of Pimco still owned by Newport Beach-based Pacific Life Insurance.
But the German insurer--Europe’s second-biggest--has said that it intends to grow and wants to develop asset management as a principal business. In a speech to shareholders Wednesday, Allianz Chief Executive Henning Schulte-Noelle said the company wants to take a leading position in the industry to avoid being “pushed onto the defensive as a victim of market developments.” It is part of the company’s strategy to grow through acquisitions “if they fit with our goals,” he said.
Munich-based Allianz has said it wants to expand in the U.S. as part of its drive to become one of the world’s top five insurers.
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Indeed, last year, “there was speculation that Allianz was looking at Franklin [Resources],” noted Maitland Lammert, an analyst at brokerage Edward Jones.
Franklin is a major manager of both stock and bond funds.
But if Franklin and Allianz were talking, nothing ever came of it.
Still, buying Pimco would be “definitely consistent” with Allianz’s strategy and “would be good for the share price,” said Matthew Wright, an analyst at Daiwa Europe.
Allianz had about $350 billion under management at the end of 1998, including $24 billion invested on behalf of private and institutional investors.
Acquiring Pimco would mean a tenfold increase in the portfolio of funds Allianz would be managing for outside clients and boost the insurer’s total portfolio by 70%.
Finally, because the majority of Pimco’s assets under management are in bond funds, Pimco’s earnings and cash flow tend to be more stable than those of most asset-management companies.
That relative stability may be attractive to Allianz.
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Bloomberg News contributed to this report.
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* BOND STAR: Pimco’s Bill Gross seeks out undervalued assets. C2
