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Acquisitions Made Amid Slow Market


At a time when merger activity in the mutual fund industry has slowed, Western-Southern Enterprise, an insurance and financial services company in Cincinnati, Ohio, is increasing its mutual fund presence through acquisitions.

Fort Washington Investment Advisors of Cincinnati, an affiliate of Western-Southern, announced on Aug. 27 that it has reached an agreement to buy the mutual fund and back office businesses of Countrywide Financial Services of Cincinnati, a subsidiary of Countrywide Credit Industries. Executives declined to disclose the purchase price.

Countrywide Financial's asset management subsidiary, Countrywide Investments, is adviser to the Countrywide Funds and has approximately $1.3 billion in assets under management in mutual funds and separate accounts. Countrywide Fund Services, which provides fund accounting and transfer agency services for smaller fund groups, has approximately $15.4 billion in assets under administration.

The Countrywide Financial acquisition probably will not be the last mutual fund company purchase for Western-Southern. The company is continuing to search for mutual fund acquisitions, said Jill T. McGruder, president and CEO of Western-Southern affiliate Touchstone Securities of Cincinnati, in an interview last week. Western-Southern would like to acquire an equity asset manager with up to $20 billion in assets under management and a growth-oriented investment strategy, McGruder said.

Touchstone, with three variable annuities and eight mutual funds, has approximately $400 million in assets under management.

The acquisition of the Countrywide Funds, a $1 billion fund group, with roughly 90 percent of its assets in money market and fixed-income funds, complements the value-oriented equity bent of the Touchstone Funds, executives said.

The Countrywide funds "really do bring something to the table we don't offer," McGruder said.

Although final decisions have not been made, Touchstone expects to clone at least some Countrywide funds and include them as sub-accounts in its variable annuity products. A transition team of executives from the companies will consider whether some of the Countrywide and Touchstone funds will be merged, if the Countrywide Funds will have their names changed and whether employees will be laid off, McGruder said.

Countrywide no longer wants to offer a line of proprietary mutual funds and instead plans to form alliances with several companies to offer investment products, the company said in a statement. Countrywide executives declined to comment beyond the statement.

Western-Southern's ambitions to make further acquisitions seem to fly in the face of recent merger history in the industry which has seen as many high-profile failed deals as successful ones. The planned acquisition by Liberty Financial Cos. of Boston of the SoGen Funds of New York, for example, was canceled in March after the SoGen funds suffered persistent redemptions. Nationwide Financial Services of Columbus, Ohio, also called off talks to purchase Pilgrim Baxter Associates of Wayne, Pa. in October as Pilgrim suffered redemptions in its funds.

With some exceptions - such as the purchase by Credit Suisse Asset Management of Warburg Pincus Asset Management, both of New York, in February and the purchase by ReliaStar Financial Corp. of Minneapolis of Pilgrim America Capital Corp. of Phoenix, Ariz. in July - the fund industry is seeing fewer prominent transactions in 1999 than it has in the past three years, fund executives, lawyers and observers said.

"There is no question that M&A activity has really slowed down," said Burton Greenwald of Philadelphia, a consultant to mutual fund companies. "You just don't have the sellers' market that you've had in recent years."

Concerns about limited sales growth and rising redemption rates for some firms have made potential acquirers reluctant to buy fund firms at premium prices, Greenwald said. At the same time, sellers have come to expect that their businesses will bring a high price, Greenwald said. The gap between the risk buyers are willing to take because of uncertainty about sales growth and the price sellers expect based on past experience has slowed the volume of deals, Greenwald said. The transactions that do occur now often are based on the ability to cut costs or the desire of foreign firms to gain entry to the U.S. market, Greenwald said.

SNL Securities, a financial services data tracking company of Charlottesville, Va., reports that, through Aug. 27 of this year, companies announced 32 transactions involving investment advisers and asset management firms. By comparison, 38 deals were announced during the first eight months of 1998, according to SNL.

The slowing pace of acquisitions has not deterred Western-Southern. The company is building its mutual fund business to offer existing insurance customers mutual funds and to anticipate demand for funds as baby boomers age, a spokesperson said.

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