O.C.’s Pimco to Sell 70% Stake to German Firm

Pimco Advisors Holdings LP, one of the world’s largest bond managers, agreed Sunday to sell a 70% stake in 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 AG for $38.75 a unit in cash, valuing the entire company at $4.7 billion.

The $3.3-billion price tag is the second-highest amount ever paid for an Orange County company, following the $3.9-billion acquisition in January of Costa Mesa-based Avco Financial by Associates First Capital.

Pimco’s well-respected fixed-income unit, headed by star bond manager William “Bill” Gross, will remain based in Newport Beach. Gross will continue to run 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 Pimco Chief Executive William Cvengros would remain with the company. About five top Pimco managers will relocate to Munich as part of the deal, but no layoffs are expected.

Pimco employs about 1,200 worldwide, including 585 in Orange County.

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,” Pacific Life Chairman Thomas C. Sutton said.

The combined companies, to be headquartered 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 2000.

Analysts said it was unlikely that Allianz would make substantial changes in the day-to-day operations of Pimco or risk alienating its key managers in Newport Beach.

“This isn’t like a bank merger, where they come in and close a bunch of branches,” said Mark Constant, analyst at Lehman Brothers 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.”

First Assignment: the Culture Clash

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.”

Underscoring Allianz’s respect for Pimco’s bond expertise, the Newport Beach company will take over an additional $100 billion in assets from Allianz and operate them under the Pimco name.

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. Over the next five years, Pimco has said, it 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 in assets.

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.

Allianz Has Plans for Asset Management

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 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.”

The deal almost hit a snag last 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 the purchase of Pimco until the list was released.

But on Oct. 21, Allianz agreed to allow an Israeli-based review of its records 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 what Pimco had been trading at this summer 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. Allianz, which trades on the Frankfurt Stock Exchange, fell $1.27 a share to close at $307.03 Friday.

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Pimco Purchase

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:

Pimco

Headquarters: Newport Beach

Operations: Manages more than $250 billion for corporate, institutional and individual investors, primairly through 50 bond and stock mutual funds.

Founded: 1971

Leadership: William D. Cvengros, chief executive; Kenneth M. Poovey, chief operating officer.

Employees: 1,200

Allianz

Headquarters: Munich

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

Biggest Buyouts

Allianz AG’s proposed acquisition of Pimco Advisors Holdings is the second largest amount ever offered for an Orange County-based company. Here’s a look at 12 of the largest buyouts in the county’s history. Dollar amounts in millions.

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Company Acquirer Amount Completed Pimco Advisors Allianz AG TK Pending Avco Financial Assoc. First Cap. 3,900 Jan. 1999 Rockwell Intl.* Boeing Co. 3,200 Dec. 1996 FHP Intl. PacifiCare 2,100 Feb. 1997 American Savings Wash. Mutual 1,700 Dec. 1996 Experian Great Universal 1,700 Nov. 1996 Experian Bain/Lee Group 1,000 Sept. 1996 Western Bancorp U.S. Bancorp 900 Pending Natl. Education Harcourt General 812 June 1997 Wyle Laboratories Veba AG 810 July 1997 Ford Aerospace Loral Corp. 715 Oct. 1990 Coldwell Banker HFS Inc. 640 June 1996 Irvine Apt. Comm. Irvine Co. 569 June 1999

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*Aerospace and defense units

Sources: Securities and Exchange Commission; Bloomberg News, Pimco Advisors, Los Angeles Times