The allure of the burgeoning 401(k) market was a key motivation for the long-awaited acquisition by Twentieth Century Cos., Kansas City, Mo., of Benham Management International Inc.
The transaction, announced Feb. 7, reportedly was valued at $100 million in stock and cash. It is expected to close by June.
The marriage will combine the 27 funds of Twentieth Century, known as a growth equity manager, with the 35 funds of Benham, a fixed-income specialist for a total of about $37 billion under management.
Officials hope the merged entity will manage $80 billion to $100 billion by 2000, with a growing piece coming from defined contribution plans.
"Twentieth Century started as a retail manager. Now we're up to 38% institutional. Our goal is to be about 50-50. That means our institutional business has to grow faster than our retail," said David Hughes, vice president and director of corporate marketing and service of Twentieth Century Mutual Funds.
While it might take two years before retail shareholders will be able to transfer from one fund family to another with a single phone call, 401(k) customers of Twentieth Century will be able to access Benham funds in the coming weeks, because the firm's record keeping system already accommodates outside fund families.
"The 401(k) capability at Twentieth Century does not exist at Benham," said James M. Benham, chairman of the board of Benham, Mountainview, Calif. Having that capability "is likely to grow our assets under management substantially," he said.
Twentieth Century manages a total of $26.2 billion, $10 billion for institutional investors; approximately 91% of the total is in equity funds. Benham manages $10.7 billion, of which 90% is invested in fixed-income funds.
Benham manages very little for institutional investors. Only Twentieth Century offers a bundled 401(k) plan program, which serves almost 100 clients.
"As we tried to sell 401(k) and record keeping, if we didn't have a complete product line, those assets would go somewhere else .*.*. We do have 401(k) plans with fixed income managed outside the (Twentieth Century) family," said James Stowers Jr., chairman of Twentieth Century.
He added one goal is to attract those assets to the firm. "Broadening of our product line only enhances our ability to sell that" 401(k) product, Mr. Stowers said.
Twentieth Century recently bolstered its 401(k) sales effort as well as its record-keeping services. The company offers a 100% refund on record-keeping fees if a client is not satisfied. To date, nobody has taken the company up on it.
The firm invested $20 million to $25 million in record keeping, mostly in the past three years. It also invested $30 million in imaging technology for all of its shareholder servicing and 401(k) business in 1993, which was a big attraction to Benham, Mr. Benham said.
Despite the large technology investment, Twentieth Century's full-service 401(k) business has reached profitability. When it began four years ago, it was geared to very small plans with about $5 million in assets, but recently it has been attracting plans with $50 million to $150 million in assets, said Mr. Hughes.
To attract very large plans, purely for investment management, Twentieth Century is involved in a number of alliances with consulting firms.
"Our goal is not to service the megaplans, but to add a limited number of quality plans every year and over time win larger and larger plans," Mr. Hughes said.
"One stumbling block was that people think of Twentieth Century as an equity shop. Our internal fixed income was not enough critical mass under management to create credibility in the marketplace for larger plan sponsors," he said.
"Benham's attraction was to beef up the fixed-income side of our ledger to give us more credibility and the perception that we're serious about fixed income in the plan sponsor's mind."
The merger also will broaden the risk spectrum of Twentieth Century's funds. 401(k) sponsors tend to associate the firm with its more aggressive funds like Twentieth Century Ultra but, "we have much more conservative funds than aggressive growth funds," Mr. Hughes said.
As for Benham's 401(k) business, "the toehold we had previous to this was through the alliance avenue. We had arrangements with a couple of alliances. We never made the commitment to forge our own all-inclusive package to the market," said Michael Kosich, senior vice president-business development of Benham.
Already Twentieth Century is building on its relationship with Benham to help market to 401(k) plans and other long-term oriented investors. It is registering an asset allocation fund-of-funds with the Securities and Exchange Commission.
By having a line of bond funds, Twentieth Century will benefit not only in marketing to 401(k) plans but also in stabilizing its overall revenue, which until the merger was dependent on the fortunes of the stock market, Mr. Stowers said.
James H. McKenzie, consulting director in the mergers and acquisitions practice of the Spectrem Group, San Francisco, said: "I believe without regard to price - since terms were not disclosed - it's a great merger of someone who primarily has equity funds with someone who primarily has fixed-income funds.
"It has all the elements necessary to make for a competitor in the 401(k) business."
The only factor that might make the business less attractive is pricing. "Pricing has become very cutthroat in the 401(k) business, yet the ultimate issue is delivery of quality. There is a growing market there, especially for small companies," Mr. McKenzie said.
Both firms' traditions of tight pricing "and the complement of funds they have should make them a good competitor. The only caveat is this is a very competitive market," he added.
Eli Neusner, a consultant with Cerulli Associates, Boston, said "there are always thorny issues involved, especially when you're bringing disparate asset groups together."
"It leads me to believe there will be a lot of cross referencing and usage of the other parties' support people when issues come up," with regard to employee education and communications, he said.
Glen Casey, a consultant with the same firm, said Twentieth Century has offered all of the services larger plans have come to expect from large mutual fund firms, but had been hindered by its lack of fixed income.
Mr. Stowers said the two firms have similar cultures. They are no-load companies with competitive expense ratios; officials of both are vocal opponents of "hidden" fees, such as 12(b)1 fees charged annually to shareholders.