Pimco Advisors Holdings, one of the world’s largest bond managers, agreed Sunday to sell 70% of the company to Europe’s second-largest insurer in a $3.3-billion deal that is likely to spur similar marriages between U.S. and foreign financial giants.
Ending months of speculation, Newport Beach-based Pimco said it signed a definitive agreement to sell majority ownership to Munich, Germany-based Allianz for $38.75 a unit in cash, valuing the entire company at $4.7 billion.
The combined companies, to be based in Munich, would have about $650 billion in assets under management and about 107,000 employees worldwide. The deal--subject to regulatory and shareholder approval--is expected to be completed by March.
The purchase is the latest example of global consolidation in the financial services industry, analysts said.
“The global market offers tremendous potential,” said Philadelphia mutual fund consultant Burton Greenwald, who predicted similar cross-border deals will follow the Pimco-Allianz merger.
Both Pimco and Allianz, which began merger discussions last year, have been actively seeking international partners to boost their sales worldwide.
“This will give us access and experience in 68 countries,” said Ernest Schmider, Pimco’s chief administrative officer.
For Pimco, the Allianz deal fast-tracks the company’s diversification away from the maturing U.S. market and provides a deep-pocketed parent that can help it sell products around the world. During the next five years, Pimco Chief Executive William Cvengros has said he would like to boost the amount of money the company manages on behalf of non-U.S. clients from about 6% of total assets to 20%. Currently Pimco manages about $256 billion.
As growth in the U.S. mutual fund market begins to slow, investment companies increasingly are turning to untapped markets abroad, particularly with the privatization of large pension funds in Europe and elsewhere, according to Greenwald, head of B.J. Greenwald Associates. Teaming with Allianz puts Pimco in a better position to pick up some of that business, he said.
For its part, Allianz gets a well-respected U.S. bond manager that will serve as a foothold for expansion in the U.S. A key attraction is Pimco’s fixed-income unit, Pacific Investment Management Co., which accounts for about two-thirds of the company’s assets, and its industry-leading Total Return Fund, run by Bill Gross.
“For us, a joint future with Pimco represents the decisive step forward in our strategy of establishing asset management as our third core business,” said Henning Schulte-Noelle, chief executive of Allianz. “By combining the expertise and sales forces of Pimco and Allianz, we are on our way to becoming one of the top international providers of global asset management.”
Under the terms of the deal, Pimco’s fixed-income unit will remain based in Newport Beach, under its current management. The unit will take over an additional $100 billion in fixed-income assets from Allianz and operate them under the Pimco name.
Gross will continue running Pimco’s bond investments under a new long-term employment contract, which will include a profit-sharing agreement and a retention compensation plan through 2006. It was unclear whether Cvengros would remain with the company. About five top Pimco managers, including Schmider, will relocate to Munich as part of the deal, Schmider said.
The sale will bring handsome paydays to several top Pimco managers, who together are selling their 22% stake in the company. Based on the $38.75-a-unit sale price, Gross’ holdings would be worth more than $26 million and Cvengros’ stake would be valued at about $8 million.
Newport Beach-based Pacific Life Insurance, which spun off Pimco in 1994, is keeping its 30% stake in the company.
“We are optimistic about Pimco’s future and feel very positive about our continued investment in the company,” said Pacific Life Chairman Thomas C. Sutton.
The $3.3-billion price tag makes it one of the biggest deals in Orange County history.
Analysts agreed that it was unlikely that Allianz would make substantial changes in Pimco’s day-to-day operations or risk alienating its key managers.
“This isn’t like a bank merger, where they come in and close a bunch of branches,” said Mark Constant, an analyst at Lehman Bros. in San Francisco. “There’s no faster way to pour money down the drain than to pay big bucks for a people business and then drive all the people away. I’m sure both companies are interested in retaining the culture and autonomy of Pimco, and allowing it to flourish.”
Nevertheless, one of the biggest challenges to the deal will be resolving differences in culture and style, particularly for Pimco managers, who will be reporting for the first time to a German-based corporate parent.
“Culture is going to be key,” said Lloyd Greif, president of Greif & Co., a Los Angeles-based investment bank. “There are going to be differences in perspectives, and some problems will be inevitable.”
The deal almost hit a snag earlier this month when Jewish groups threatened a boycott of Allianz unless the German insurer released a list of its unpaid policies from the Holocaust era. California Insurance Commissioner Chuck Quackenbush threatened to delay state approval of a purchase of Pimco until the list was released. On Oct. 21, Allianz agreed to have an Israel-based archive review the names in an effort to find Holocaust survivors and their heirs who might be entitled to payments.
The price that Allianz is willing to pay--which is nearly 30% higher than Pimco’s market value before the Allianz rumors emerged--suggests that Wall Street is undervaluing money managers and investment companies, Constant said. He predicted that stock prices for other publicly traded fund companies could rise as a result of the Allianz offer.
Pimco stock closed Friday at $34.69 a unit, up about 2% in New York Stock Exchange trading.
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Pimco Advisors, one of the world’s largest money-management firms, agreed Sunday to sell a 70% stake to German insurance giant,Allianz. A look at the two companies:
Headquarters: Newport Beach
Operations: Manages more than $250 billion for corporate, institutional and individual investors, primairly through 50 bond and stock mutual funds.
Leadership: William D. Cvengros, chief executive; Kenneth M. Poovey, chief operating officer.
Operations: Europe’s second-largest insurer wiht more than $400 billion in assets. The company’s 1998 profit of $2.02 billion was up 29% from a year earlier.
Leadership: Henning Schulte-Noelle, CEO; Diethart Breipohl, chief financial officer.
Employees: 105, 675
Major U.S. holdings: Fireman’s Fund Insurance Co., Novato; Allianz Underwriters Insurance Co., Burbank
Sources: Securities and Exchange Commission; Bloomberg News, Pimco Advisors, Los Angeles Times