The merger announced Thursday of two leading investment specialists, Liberty Financial Cos. and the Colonial Group, promises to create one of the most powerful and fully integrated suppliers of investment services to banks.
Liberty Financial, which helps banks run investment sales programs, agreed to purchase Colonial, which sells over $1 billion of mutual funds through financial institutions each year, for $310 million.
The two Boston-based companies said they will achieve "critical mass" in the transaction, and analysts said banks have much to gain because of the combined organizations' broader range of products and services.
Indeed, the transaction will make Liberty Financial "among the biggest if not the biggest distributor of investment products and services to banks," said Keneth R. Leibler, president of Liberty.
Liberty's financial service units include Keyport Insurance Co., an annuity company, and Stein Roe & Farnham, a money management firm that primarily caters to high-net-worth individuals. The company also has a modest array of retail mutual funds, but nothing like Colonial's lineup that has particular appeal to bank customers, Mr. Leibler said.
The two companies are not strangers to each other. Liberty's Keyport unit already allows customers to place money in Colonial funds when they choose investments for their annuities.
Executives at Colonial, which will remain autonomous, say the merger solidifies the company's position in an industry that's expected to contract.
"As we go forward, size is going to be the key to survival," said Craig S. Howard, director of the bank sales division at Colonial.
Colonial has $14 billion of assets under management, and is the fourth-largest supplier of mutual funds to financial institutions.
Liberty brings to the deal $29 billion of assets under management -- 75% in annuities and the balance in mutual funds and privately managed funds. Liberty sold $1.6 billion of mutual funds and annuities through banks last year, putting it among the five largest nonbank suppliers of investments to bank customers.
The combined operation will have a roughly 50-50 split between annuities and funds, a balance that appealed to Liberty, Mr. Leibler said.
"This gives us an array of products that can serve customers at various cycles in their lives," he said.
The transaction, in which Colonial shareholders can choose a $40 cash payment or newly-issued stock, is expected to close in the first quarter of next year. In the process, Liberty, a part of the Liberty Mutual Group, will become 20% publicly owned, achieving a goal it had sought since last year.
Liberty's move brings an end to speculation on who would win the bidding for Colonial, which has been on the block for months. Other bidders included mutual fund and insurance companies, industry sources said.
Banks "were not sniffing around," said Glen Casey, consultant at Cerulli Associates in Boston. He said Colonial's product line is dominated by fixed-income products, in which banks are already well positioned.
Bankers said Liberty's management has the savvy to make the combined venture work.
"I don't anticipate any problems with the merger," said Richard E. Funk, president and chairman of Atlantic Federal Savings Bank, Baltimore. "We've always had good dealings with Liberty and I'm sure that will continue."
But at least one of Liberty's competitors said the arrangement may not bode well for banks.
"There's some doubt in my mind" about investment product marketers who sell their own products, said Richard Saalfeld, chairman of CoreLink Resources, an investment products marketer in Concord, Calif. "It raises questions about suitability and objectivity."
Mr. Leibler, the Liberty president, said banks have already embraced Colonial, as evidenced by the company's substantial sales through financial institutions.
Indeed, analysts say that the merged company could catapult over the competition to become the top seller through banks.
