If the devil is in the details, Frank Russell and Northwestern Mutual Life could face a devil of a time.
Executives from Frank Russell Co. and Northwestern Mutual Life Insurance Co. announced earlier this month the mutual insurance company would purchase Russell for almost $1 billion.
Northwestern executives said their initial focus would be on Russell's 32 mutual funds and its manager-of-managers model. After that, they said, they'll see what develops.
"Northwestern is making a strategic acquisition of Russell, independent of any synergies they might gain. They have put themselves in a position to get an extended range of financial services, reaching into the equity markets. It doesn't have to be all worked out -- not if you trust the other people," said George Russell, Russell's chairman.
Also of interest to Northwestern is Russell's worldwide offices; Northwestern only has domestic operations.
Industry observers say the combination illustrates the ongoing convergence of financial services businesses and the race to get investment dollars.
"The insurance companies want to be considered investment experts," said Jeb Britton, director of merger and acquisition services at Spectrem Group, a San Francisco consulting firm.
"It will be interesting to see what Northwestern does to capitalize on this, because everything staying the same doesn't make sense. Their business should change," he said.
The marriage to Northwestern allows Russell to continue to run its businesses as it had previously, said Chas Burkhart, president of Investment Counseling Inc., a West Conshohocken, Pa.-based strategy adviser for the investment management industry.
"They're unlikely to merge the businesses because there's no overlap. That may have been a selling point for Russell," Mr. Burkhart said.
Russell's fee-rich asset management business will be a goose that lays golden eggs for Northwestern, said one analyst. Northwestern doesn't need to change anything there; it can line up a menu of retail investment products that the insurance agents can sell, he said.
Northwestern can make a great deal more money selling the mutual funds of its own unit -- Russell -- than selling the funds of an outside company, said Thomas Courtney Jr., president of The Courtney Group, a New York investment bank.
"This opens new vistas to Russell. Russell needed a partner with access to the retail market and Northwestern wants to sell insurance products with an investment component. And if you're a pension fund, you'll still be important," Mr. Courtney said.
Russell will operate as a free-standing subsidiary of Northwestern.
Mr. Russell has a 10-year contract to remain as chairman; Michael Phillips, chief executive officer, has a five-year contract. All other staff is expected to remain as well, Mr. Russell said.
Russell will be run by a five-person board -- three from Northwestern and Messrs. Russell and Phillips. A unanimous vote would be required to change the company's name or move it from its Tacoma headquarters.
The Russell Co. has just signed a 15-year lease on its headquarters, which is owned by Mr. Russell but is being sold to an investment group.
Executives and investment staff that had held a collective 40% of Russell now have equity incentive programs. Even though few Russell employees have employment contracts, there is no concern that the absence of an equity option will affect stability, Mr. Russell said. Average turnover is about 7% at Russell, and even lower at Northwestern, executives said.
"We've had no problem attracting top people here. I see no difference in the future," Mr. Russell said. "The incentive programs may be even more attractive."
Russell's well-known sabbatical program will continue, he said.
Milwaukee-based Northwestern will have nothing to do with the day-to-day operations of the company, executives at both companies said. No Northwestern employees will be moved to Russell, they said.
CROWN JEWEL
Russell's pension fund consulting business will continue. Suggestions the consulting business be spun off are ridiculous, Mr. Russell said. "In the thousands of hours we spent talking to interested parties, there was no discussion about the consulting business being anything less than a jewel in our crown."
Russell's pension relationships may become even broader as Northwestern's financial depth will allow Russell to expand its ability to manage entire pension plans on an outsourced basis, Mr. Russell said.
Russell oversees $21 billion for pension funds through its manager-of-managers practice; its pension consulting clients have a combined $1 trillion in assets.
"We are not getting out of the pension funds business," Mr. Russell said. "We're hiring more people to support this business."
Russell executives say they have won more than $1 billion in new accounts or additional money during this current quarter; the company is pushing hard in the United Kingdom, Canada and Australia.
Mr. Russell and his wife, Jane, who were 60% owners of the firm, didn't take the highest offer for the business. Mr. Russell won't say from whom the higher bid came, nor would he name the top finalists.
"My personal concern was a cultural fit. They are not in our business and we're not in their business and it turns out to be a plus," he said.
SYNERGIES KEY
He scoffs at the suggestion that he sold the firm for the money, not future synergies.
"That's a Wall Street attitude. They come at the job with a different set of priorities. Quality of life on the Puget Sound comes higher in this particular shop. We don't make decisions based on the monetary benefits."
Also, it is a plus that Northwestern is a mutual company, not a stock company, said Craig Ueland, Russell's chief financial officer.
Northwestern is not focused on short-term performance for the sake of shareholders, "under the quarterly earnings spotlight" as some stock companies are, Mr. Ueland said. The insurer is focused on long-term horizons and prefers to do the "safe thing" as opposed to gaining size for the firm, and that's the philosophy at Russell, Mr. Ueland said. "The true test of this won't be three months or a year from now. Ten years from now, this will be a successful strategic situation."
Northwestern is one of the nation's largest life insurers, specializing in individual coverage. It also offers disability coverage and annuities.
MUTUAL FUNDS
Northwestern launched the Mason Street Funds 18 months ago. They contain a total of about $350 million. Northwestern's 7,500 sales agents are licensed and trained to sell mutual funds, which can be tucked into variable life insurance or variable annuity products.
The funds are sold through Northwestern's subsidiary, Robert W. Baird & Co. Baird is predominantly a Milwaukee broker dealer that does some investment management for individuals. It has about $1.6 billion in total assets under management, but it is not a mutual fund manager.
Seven of the nine Mason Street Funds are managed by Northwestern's internal asset management shop, the 130 investment professionals that handle the $60 billion in general insurance assets. The group had a composite investment return of 14.1% last year on $54 billion in total managed assets. The assets were invested 61% in bonds, 16% in equities, 20% in mortgages and 3% in real estate. Regulations regarding the cash value of insurance policies leads to the dominant use of bonds by insurance asset managers, according to the American Council of Life Insurance, Washington.
Mason's international equity fund is managed by Franklin Templeton Group and the growth and income stock fund is managed by J.P. Morgan Investment Management.
Northwestern executives said they are not interested in Russell's managers handling general insurance assets, nor managing the Mason Street Funds.
Northwestern officials said in a statement they don't intend to change Russell's products or services because "to do so would jeopardize the substantial investment we have made."
