KANSAS CITY, Mo. - J.P. Morgan Chase & Co. is buying out American Century Cos. Inc.'s share in a joint venture the two formed in 1998 to offer bundled defined contribution plan services.
"We have an agreement in principle to purchase (J.P. Morgan/American Century) Retirement Plan Services," said Jeff Garrity, chairman of J.P. Morgan/American Century and a managing director of J.P. Morgan Chase. It would shift 100% ownership of the venture to J.P. Morgan.
The deal - for which little money is expected to change hands - should close next quarter, said Mr. Garrity, who was responsible for the formation of the joint venture.
The issue was who would control the assets under record keeping built up as part of the J.P. Morgan/American Century joint venture. If the deal is completed as planned, J.P. Morgan will gain control over the important rollover IRA market.
Issues of control
"The issue's around control of their strategic direction," said Joshua Dietch, director with Cerulli Associates, Boston-based consulting firm.
American Century had controlled the distribution chain for the defined contribution services because it had the sales force. Last summer, J.P. Morgan brought broker Brown & Co., Philadelphia, under its retirement services division. J.P. Morgan also has expanded its distribution pipeline in the past few years, and now has relationships with Hotchkis & Wiley Capital Management, Mellon Investor Services, Towers Perrin, Financial Engines Inc. and TBG Financial Inc.
Another issue, in addition to control of rollover assets, was costs.
The J.P. Morgan/American Century joint venture was set up so the parent companies would gain from the increased asset management but neither would have the record-keeping system on their books.
The record-keeping business is entirely owned by the joint venture, which is a separate business, Mr. Garrity said.
Consultants said J.P. Morgan/American Century has a high-quality record-keeping service but it is very costly to maintain, and has become a drain on the resources of the parent companies. (Neither Mr. Garrity nor Laura Kouri, an American Century spokeswoman, would say how much the parent companies contributed to the joint venture.)
The consultants predict that if the deal closes, J.P. Morgan quickly would enter into an arrangement with a record keeper that does not have its own line of investment options.
"The deal is a failure of management to acknowledge the changing conditions in the marketplace," said Ward Harris, president and chief executive officer of McHenry Consulting Group, Berkeley, Calif. "I do not see Morgan being in the record-keeping business. There are three logical non-competing platforms that would be a natural destination for their record keeping book of business: 401k Company, Milliman USA and Charles Schwab Co."
Under the terms of the deal, J.P. Morgan will retain its 45% ownership in American Century and will continue to distribute American Century funds, Mr. Garrity said.
The retirement business "will be driven by Morgan, but offering both products," Mr. Garrity said. "Morgan will have more control over the rollovers. The whole issue around rollovers is ... an additional growth opportunity."
For American Century, the deal would get it out from under the financial strain of paying for its share of the joint venture expenses, and allow it to concentrate on investment management.
"We are very interested in focusing on our investment management capabilities," said Ms. Kouri. "This will support our long-range strategy."
She denied industry rumors that the Stowers family, which owns American Century, is looking for a way to exit the business. "The Stowers family remains committed to American Century," Ms. Kouri said.
"American Century wants to participate (in the joint venture) but it can't continue to fund it," Mr. Garrity said. "American Century can't afford to spend the money ... and as an owner we think that is the right decision."
"American Century's focus is investment management now and for the long term," Mr. Garrity said.
American Century would lose control over the rollover assets and would not have its name before plan participants as the primary provider, a key ingredient to keeping participants' assets when they leave their employers, industry insiders said.
There's a lot of money up for grabs. The joint venture started with $10.8 billion under record keeping in 1998 and grew to $41.6 billion as of year-end 2002, Mr. Garrity said. Participants in its record-keeping system increased to 724,000 from 193,000; the average client plan size increased to $255 million from $31 million; and the average account balance jumped to $57,000 to $25,000.
Along the way, however, the joint venture took on record-keeping-only duties for larger plans. Last May, J.P. Morgan/American Century was hired for Fort Worth, Texas-based American Airlines Inc.'s $3.8 billion 401(k) plan, agreeing to do record keeping while indirectly managing only a small slice of plan assets. J.P. Morgan Fleming Asset Management, New York, the investment management group of J.P Morgan Chase, manages a $600 million long-duration bond fund and a currency overlay program for American's $5.6 billion defined benefit plan, and co-manages a large-cap growth fund for the 401(k) plan.
Currently, between 50% and 60% of J.P. Morgan/American Century assets under record keeping are in proprietary funds, and those assets, in turn, are split fairly equally between J.P. Morgan and American Century funds, Mr. Garrity said. Under the new agreement, American Century funds would still be offered as proprietary funds.
Company executives have not determined what the new name will be, he said. But one thing is fairly certain: the new name won't have American Century in it.