PITTSBURGH -- Rather than try to build it, Mellon Bank Corp. this time will buy equity mutual fund prowess to bolster its institutional and retail mutual fund business.
Mellon's purchase of Founders Asset Management Inc., Denver, a proponent of a "growth, plain and simple" style, will fill a gap in the company's equity management line up, said Christopher M. "Kip" Condron, Mellon's vice chairman.
It's also a good fit on the mutual fund distribution side. Neither Mellon nor its existing mutual fund subsidiary, The Dreyfus Corp., New York, does much business in Founders' primary distribution channels -- financial planners, broker/dealers, mutual fund alliances and as a subadviser of insurance company accounts.
And with a shortage of good independent money managers available for acquisition, coupled with Founders' five four-star rated growth equity mutual funds, the reported $275 million price Mellon agreed to pay is considered by many to be reasonable.
Mellon officials declined to comment on the price it will pay for Founders when the deal is completed at the end of February.
The deal requires shareholder approval on both sides, as well as approval from the Securities and Exchange Commission.
The resulting company would offer 48 equity mutual funds and have about $19 billion under management for defined contribution plans. Founders would add its nine growth equity, one bond and one money market fund to the 39 equity funds managed by Mellon and Dreyfus and to the dozens of bond, balanced and money market funds the entity also offers.
Mr. Condron said he does not expect to have to merge funds from either company because there is little duplication of asset classes.
Founders will remain an independent money management operation and most of the top management and portfolio managers will stay in place in Denver. Jon Zeschin, Founders president, will become chief executive officer.
Founders manages a total of $6.4 billion, $3.5 billion of which is from institutional investors.
Founders' chairman and current chief executive officer, Bjorn K. "Erik" Borgen, will remain a director of Founders Funds and has agreed to enter into a consulting agreement with Mellon. He essentially is the sole shareholder of the company, Mr. Zeschin said.
Some observers wonder whether Mellon, which has a checkered history of keeping staff happy at acquired money management firms, will be able to leave Founders alone to manage what it does best -- growth stocks in mutual funds.
Mellon was rocked by a staff exodus from its Boston Co. subsidiary in 1995 (Pensions & Investments, May 1, 1995), one of its most important money management subsidiaries.
Not a 401(k) powerhouse
The portion of Mellon's assets under management from defined contribution plans is relatively small -- just $17.5 billion of the total of $300 billion under management by eight money management units and 48 mutual funds.
Even rounding out its equity capabilities may not be enough to propel Mellon into the league of such heavy hitters as Fidelity Investments, TIAA-CREF and The Vanguard Group of Investment Cos.
"It's politically correct to be able to say that you can offer a full spectrum of funds. And Mellon, as a bundled 401(k) plan provider, will be more attractive with enhanced investment capabilities, but it's still not a really winning situation," said Peter Starr, a principal at consultants Cerulli & Associates Inc., Boston.
"It's like putting a dress on a cow. It looks better, but better than what?"
Mellon's Mr. Condron, who is also the chief executive officer of Dreyfus, was confident the deal will be good for Mellon, Dreyfus and Founders. "We're a $300 billion asset management power house, but we don't have a growth style. Founders fills a style void, with very little overlap with our other equity styles."
Mellon makes most of its defined contribution sales on a direct basis rather than through intermediaries. Mutual funds from Mellon subsidiaries are not often used on an investment-only basis. Dreyfus serves as the main conduit for DC plan services. An internal division of Mellon centralizes record keeping, although some is handled through Buck Consultants, New York, the employee benefits consulting firm that Mellon bought last year.
Founders, on the other hand, has avoided offering record keeping services and makes its funds available primarily through mutual fund alliances and through mutual fund supermarkets. The company also has stuck to the mutual fund format; only $300 million is managed in vestiges of separate accounts for endowment and foundation clients.
The weak spots Founders' management identified were 401(k) plan asset management and sub-advisory variable annuity work.
By concentrating on developing relationships with the major mutual fund alliances, Founders built up a $1.3 billion pool of 401(k) plan assets, all on an investment-only basis. Further concentration on the insurance market led to sub-advisory relationships totaling another $1.5 billion.
Aside from cross-selling each others' funds in the distribution channels where each company has special strengths, Mr. Condron said, Founders will be left alone to manage growth stocks.
Mr. Zeschin, however, said Mellon has indicated that in 1998 or 1999, Founders probably will begin managing defined benefit plan assets in some way. Mellon and Dreyfus together managed about $170 billion in defined benefit plan assets as of Sept. 30.
