Wells to Buy Assets of Strong Financial
Beefing up its mutual fund and asset-management business, Wells Fargo & Co. said Wednesday that it would buy the key assets of Strong Financial Corp., whose founder, Richard Strong, agreed last week to pay $60 million to settle charges that he made improper trades in his company’s funds.
The purchase includes $27 billion in assets held by Strong Capital Management Co., the firm’s mutual fund manager. That will boost Wells’ total mutual fund assets to $103 billion, putting the San Francisco financial company among the nation’s top 20 fund operators.
Wells also is buying $7 billion in other investment accounts from Wisconsin-based Strong.
The deal, which had been expected, helps advance Wells Chairman Richard Kovacevich’s strategy of selling customers a broad range of financial services so that the firm, which includes the nation’s fifth-largest bank, isn’t dependent on any single product such as mortgages.
Wells executives said the deal offered a good fit because Wells’ lineup of 69 mutual funds is dominated by bond funds. Strong, with 70 funds in all, is heavier in stock funds.
“Strong’s research-driven, equity-style products will help round out” Wells’ lineup, said Mike Niedermeyer, head of Wells’ asset-management unit.
In addition, analysts said Strong’s operations might benefit from Wells’ methodical management approach.
“Strong has had this kind of stream-of-consciousness rollout of funds. ‘Asia’s hot? Let’s have an Asia fund! Internet happening? Get an Internet fund today!’ ” said Russ Kinnel, director of analysis at Chicago-based fund tracker Morningstar Inc.
“Dick Strong was an extreme version of the classic business school case -- an entrepreneur who can take a business so far and then you need a whole management layer for the company to grow to the next phase,” Kinnel said.
Terms of the deal weren’t disclosed. Joe Duwan, an analyst with investment research firm Fox-Pitt Kelton, said Wells typically delayed some of its payments for acquisitions over three to five years, making adjustments depending on performance and asset retention.
That could be important at Strong, whose assets have slumped from $42 billion to $34 billion since last fall, when New York Atty. Gen. Elliot Spitzer publicly targeted the firm, and later Richard Strong himself, in a fraud probe.
Richard Strong’s $60 million in fines and repayment of ill-gotten profit is the largest settlement by an individual in the fund-trading scandal. He was accused of “market timing,” or seeking profit by making rapid-fire trades in his funds.
Strong’s firm will contribute an additional $80 million to settle the case. The firm also agreed to reduce fund fees by $35 million over five years.
Analysts including Christopher Eklund of Berkshire Capital Corp. estimated that Wells would initially pay about $500 million for the Strong assets, half the amount some believed they could fetch when Richard Strong quit and put the firm up for sale in December. He owns about 85% of the company.
Wells said the deal was structured as a purchase of assets, not a takeover of the entire company, a move designed to protect Wells from any remaining liability for Strong’s misdeeds.
Wells also said it had signed employment contracts with key fund managers at Strong.
Wells spokesman Won Ha said it hadn’t been determined how many similar funds at the two firms might be merged as the operations are meshed, or even whether the Strong name would remain on any funds.
“It’s kind of a damaged brand, so I’m not sure you’d want to” retain the name, Morningstar’s Kinnel said.
Wells shares rose 37 cents to $59.12 on the New York Stock Exchange.
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Strong’s biggest funds
Here are the 10 largest mutual funds managed by Strong Financial and their year-to-date returns.
*--* Strong fund Assets (billions) YTD total return Opportunity $2.64 +5.3% Advisor Small-Cap Value 2.08 +0.1 Ultra Short-Term Income 1.70 +0.7 Government Securities 1.59 -0.7 Growth 1.58 +2.9 Advisor Common Stock 1.50 -0.7 Ultra Short-Term Muni Income 1.37 -0.2 Money Market 1.21 NA Tax-Free Money Market 1.06 NA Municipal Money Market 1.02 NA
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NA -- not available, though money market fund returns normally are positive in any given period
Source: Strong Capital Management
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Reuters and Bloomberg News were used in compiling this report.
