Pilgrim Baxter & Associates and Newbold's Asset Management Inc., two UAM units, will merge within a year.
The merger will give Bryn Mawr, Pa.-based Newbold's a mutual fund presence and distribution opportunities. Pilgrim Baxter, Wayne, Pa., will be able to broaden the offerings in its successful mutual fund family, such as adding a value equity fund.
Newbold's is a value manager; Pilgrim Baxter, a growth manager.
As a first step, the two firms are combining marketing, client service, finance, compliance and operations. Portfolio management will remain separate until the complete merger.
Harold Baxter, Pilgrim Baxter's chief executive officer, has assumed the same position at Newbold's. Timothy Havens, who had been CEO at Newbold's, will retire in September. Daniel J. Hopkins, Newbold's president, will retain that title.
There are no decisions yet on who will head various areas in the combined firm, said Mr. Baxter, but he added there will be no layoffs.
"We have enjoyed good growth this year and we are in need of incremental people. When these two companies come together, it would not surprise me to see more staff than the companies had individually," he said.
Now, Gary Pilgrim is chief investment officer at Pilgrim Baxter, while Edward Shadek and John Schneider are director of strategy and director of research, respectively, at Newbold's; Laurence Lynch and Jeffrey Van Orden are the marketing chiefs at the two firms.
The combined firm will have more than $20 billion under management, about two-thirds from Pilgrim Baxter.
The name and headquarters of the merged firm have yet to be decided, Mr. Baxter said.
No money will change hands in the deal, since both firms are owned by United Asset Management Corp., Boston, Mr. Baxter said.
The merger idea originated with executives of the two firms, but "UAM blessed it," he said. He likened it to the recent merger of UAM's Seattle-based affiliates Sirach Capital Management Inc. and Olympic Capital Management Inc., another instance where two complementary managers merged with UAM's approval.
"We've certainly given them our blessing," said UAM President Norton H. Reamer. UAM has no policy to encourage affiliates to merge, but the advantages of adding products, coupled with Pilgrim Baxter's distribution and Mr. Baxter's leadership, made it a good idea, he said.
"Having value capability is a new dimension for Pilgrim Baxter and having mutual fund skills is a new dimension for Newbold's," Mr. Reamer said.
Industry observers noted the merger is the third involving UAM affiliates this year. They said the deal seems to support the ongoing trends of acquisitions and the planning for the succession of firms' principals as they near retirement age.
They note the two firms are in the critical midsize range that industry research claims will be affected most by the merger and acquisition trend.
From a business standpoint, the deal is good strategy, said Casey Magner, senior consultant with SEI Capital Resources in Chicago. Besides bringing together growth and value products, there are economies of scale to be gained by combining operations such as trading, marketing and client services, he said.
Pilgrim Baxter has made a good transition to offer not only institutional products, but also expand into the retail area with very successful mutual fund offerings, said Mr. Magner. By bringing both firms together, they could offer small- and midcap value products managed by Newbold's under the well-regarded PBHG fund family.
Pilgrim Baxter has stronger distribution and marketing than Newbold's "by far, and certainly the brand identity," said Gregory Hazlett director of research at Investment Counseling, Inc., West Conshohocken, Pa.
"When its all said and done I think you'll find it's all consolidated under the Pilgrim Baxter name instead of Newbold's .... Perhaps they need to get used to a value product under the Pilgrim Baxter name," he said.
Some observers noted Pilgrim Baxter has been more successful in managing its operations and growing its assets than Newbold's, which went through a growth spurt in the early 1990s, but had appeared stalled in recent years.
The firm had suffered both from performance slippage and from the value style's loss of favor among investors, said Mr. Hazlett.
"I think you see someone who's on the upswing vs. someone who's perhaps on the downswing, uniting and joining forces," he said.
According to the Pensions & Investments Performance Evaluation Report, Newbold's value equity composite showed a 4.6% return in the first quarter, and 25.6% and an annualized 14.8% return for the one- and three-year periods ended March 31. By comparison, the Standard & Poor's 500 index returned 5.37% for the quarter and 32.1% and 15.71% for the one- and three-year periods, respectively.
Bruce C. Harter, treasurer of Orlando, Fla., who oversees the $387 million Orlando Retirement Systems, said the fund had been watching Newbold's because of Mr. Havens' expected retirement and the firm's performance slippage.
"We have no immediate concerns regarding the merger. It's just one more thing in the corporate business for them," said Mr. Harter. But he added officials will be watching as the merger develops and "if the merger causes disruption that hurts performance, we would act quickly."
Newbold's manages $53 million for Orlando.
From a revenue standpoint, the combined Pilgrim Baxter/Newbold's will be the third-largest UAM affiliate after real estate manager Heitman Capital Management and Provident Investment Counsel, which is also the largest in terms of assets, according to Mr. Reamer.
