MENOMONEE FALLS, Wis. — Prospective buyers of Richard S. Strong's controlling stake in Strong Financial Corp. will need strong stomachs, as well as talented investment bankers and lawyers, to cope with the critical mass of uncertainty enveloping the firm, industry watchers said.
Beyond that, there is little agreement on what type of company can best leverage Strong Financial's assets and infrastructure, or whether a deal can be hammered out before a critical level of investors leave and headhunters start picking off key portfolio managers.
The latest news from Strong won't make it any easier for Goldman Sachs & Co., the New York investment banking giant that Strong Financial hired last week, to find a buyer for Mr. Strong's stake in the company, reported to be 90%.
Mr. Strong, who founded the company 29 years ago and pioneered its impressive growth, resigned from all his posts Dec. 2, as state and federal regulators pushed ahead with plans to charge him and his company with civil fraud, related to market-timing activity.
As the week ended, there were signs that clients were opting to take their money elsewhere. Strong suffered almost $2 billion in mutual fund redemptions during November, almost four times October's net outflow. Meanwhile, several pension fund clients, on the advice of their consultants, placed the money manager on watch to closely monitor further developments.
In a statement, Strong Financial described a sale of Mr. Strong's stake as an option under consideration rather than a certainty, noting that "nothing may come of this exploration."
Analysts say something had better come of it, and soon. Companies eyeing Mr. Strong's stake will have to view his firm as a fatted calf that has fallen into a piranha-infested pool: The longer it stays in the water, the greater the uncertainty about how much will be left when it's fished out.
With Mr. Strong's personal legal woes likely to worsen, a quick sale might head off further damage. For example, the $2.6 billion North Dakota State Investment Board, Bismarck, is scheduled to meet Jan. 16 to review Strong, and movement toward the disposition of Mr. Strong's stake by that time would help satisfy officials, said Steve Cochrane, executive director of the fund. The fund has $115 million in Strong's enhanced S&P500 index fund, and another $51 million in Strong's Triple B Bond fund.
If Mr. Strong and his company would be best served by a quick sale of his stake, buyers would be well advised to move forward carefully, analysts said.
Strong Capital is a valuable franchise with attractive products, but the taint of scandal will force potential buyers to discount that value as they try to guess the scale of outflows, said Chas Burkhart, chairman of West Conshohocken, Pa.-based Rosemont Partners, a private equity firm focused on the asset management industry.
Investment bankers said any buyer will want to put up as little cash as possible and anchor the deal on an "earn out" provision in which the bulk of the payment can be based on whether Strong's assets under management stabilize.
That arrangement would give Mr. Strong a big incentive to move quickly to find a buyer, and to choose wisely, as the buyer's skill in growing the franchise will determine the scale of his earn-out reward.