TACOMA, Wash. -- The Frank Russell Co. would probably fetch about $1 billion whether it sells itself through an IPO or to another financial services company.
Given a hot stock market and record-breaking financial services transactions, no one seems surprised by the news that Russell Chairman George F. Russell Jr. has hired Goldman, Sachs & Co. to explore future directions.
Some possible courses under consideration:
* Making an initial public offering for Russell company stock;
* Acquiring other companies or merging Russell with another; or
* Selling the whole company or spinning off one or more units.
Chris Phillips, a Russell spokesman, said officials wouldn't discuss the strategic plans of the privately held company. (The Russell family owns 60% of the company; employees own the remainder through their profit-sharing plan.) Mr. Phillips acknowledged the company has received overtures in the past from potential suitors and that thinking about the future is "not a new phenomenon for us."
Market observers are laying their bets on Russell going public, rather than spinning off the company's components -- a global investment consulting practice for pension clients with more than $1 trillion in assets and a money management division with more than $40 billion under management.
"It is my understanding that Goldman, Sachs is looking at setting up an IPO for Russell, rather than a sale . . .," said Bruce McEver, an investment banker at Berkshire Capital Corp., New York.
Eli Neusner, a senior consultant in the New York office of strategic consultants The Spectrem Group Inc., also sees the company going public. "Valuations are high right now and Russell represents a sizable money management business without any baggage. It would be a pure asset play for an acquirer," Mr. Neusner said.
But "an IPO would represent a real long-term commitment to building the business for the future. If they get an infusion of capital through the stock market, they will use it to build up new businesses."
As for consulting, he said, "It's a dead-end business. . . . Russell should have sold it five years ago because there's so little upside potential left in it. . . . Russell used it as a segue to the asset management business and they did it rather impressively. But they could make it without the consulting side now."
WHAT'S IT WORTH?
Sale of the entire firm to another company or through an IPO probably would raise about $1 billion, based on the lower multiples likely for the consulting side of the business and the higher multiples of the investment management business, estimated Paul Holt, president of Cambridge International Partners Inc., New York.
But it is difficult to guess what Russell would fetch; that depends on which businesses were spun off or kept together, prior to an IPO.
While Russell has been known for its investment management consulting, its manager-of-managers money management business has exploded during the 1990s. Between 75% and 80% of company profits come from the money management side of the business (Pensions & Investments, April 6).
Glen Davis, a consultant at Eager Associates Inc., Louisville, Ky., noted Russell's valuation is complex to calculate. "It's driven by whether the (company) is worth more as a whole or split up."
A sale, he said, would draw great interest, because Russell is "a brand without equal in the institutional business."
Mr. Davis suggested Russell executives figure out how to better position the company to address the market for individual investment management, which is growing much faster than the institutional market. The company would be more attractive to a potential suitor if it brought with it a strong product line and distribution system targeted at individual investors through defined contribution plans, private account management, wrap accounts and mutual funds.
David Silvera, a senior consultant at Investment Counseling Inc., West Conshohocken, Pa., said consulting firms have sold for about one times revenue. With its scale, a strong market presence and name recognition, a "fair price" for the investment business would be between three and four times revenue, Mr. Silvera said.
Russell's projection for 1998 net revenue for the entire company is $260 million. Officials were unable to provide a breakdown between consulting and investment management. Inherent in Mr. Silvera's estimate is a belief the money management side would fetch less than a traditional manager would. That's because Russell's manager-of-managers approach removes it from direct control of the money management process.
WHAT ABOUT SUCCESSION?
Russell has succession issues, and the combination of a hot stock market and huge prices paid recently for financial services companies make it a good time to consider an IPO or a sale.
Mr. Russell, the chairman, is 65, and it's not unreasonable to expect him to retire soon. Russell spokeswoman Sherry Wilson said many of the day-to-day responsibilities of the company are handled by Michael Phillips, president and chief executive.
Only one of Mr. Russell's four adult children is actively involved in the company. He is Eric Russell, president of Frank Russell Investment Management Co., which handles the sales of the company's 42 mutual funds and various wrap programs through financial intermediaries.
Sarah Russell Cavanaugh is an executive director of the Russell Foundation and Richard Russell is a multimedia graphic designer whose own company does some communications and marketing for Frank Russell Co. Dion Russell is an administrator at a private school in Washington state.
Mr. Russell's own emphasis on research has made him popular with the firm's mostly corporate consulting client base.
George Russell joined his grandfather's firm in 1958; and assumed chairmanship when Frank Russell died. The consulting division was founded in 1969. If Mr. Russell were to assume a lesser role, some question whether the emphasis on research would diminish and if talented employees would leave.