Colonial to merge with Liberty Financial, combining $8 billion of tax-exempt assets.

Colonial Group Inc. agreed yesterday to merge with Liberty Financial Cos. in a deal that will create the 11th largest manager of tax-exempt assets and the 24th largest mutual fund company.

The combination will result in a publicly traded company, with approximately $43 billion of assets under management. The combined tax-exempt assets under management will total close to $8 billion.

Confirming rumors that a deal was in the works, yesterday's merger announcement marked the latest coupling and consolidation in the mutual fund industry.

In August, Clayton Dubilier & Rice Inc. announced the merger of its Van Kampen Merritt Cos. and American Capital Management and Research Inc. At the time, the new company was expected to have approximately $15 billion of tax-exempt assets under management.

Following the completion of the merger with Colonial, Liberty Financial will offer mutual funds, fixed and variable annuities, institutional asset management, and private counseling for individual investors.

Municipal investors will find an array of products and investment options. There will be money-market funds, and both open-end and closed-end tax-exempt mutual funds. In addition, no-load funds and those that carry sales charges will be available. Funds will be marketed through brokers and financial advisers, banks, and directly to investors.

Subject to shareholder approvals, the merger is expected to be completed during the first quarter of 1995.

Under terms of the agreement, Colonial, with $14 billion of assets, will become a wholly owned subsidiary of Liberty Financial Cos. However, Colonial will maintain its corporate identity and organizational structure. It will function largely as an autonomous operation, the companies said in a press release.

Initially, little change is expected in the tax-exempt mutual. fund operations, company executives and analysts said.

"There's very little overlap," said Neil Bathon, president of Financial Research Corp.

"You have to be a certain size to play with the big boys or you're going to get squeezed," he added.

In announcing the merger, Kenneth R. Leibler, president of Liberty Financial, said the deal "opens a new chapter in our corporate histories and ensures our reaching the critical mass we believe necessary to compete effectively in the financial services industry."

Colonial has 18 tax-exempt funds with approximately $6 billion in assets under management, Colonial officials said. This includes two closed-end funds, two open-end national funds, and nine single-state funds. Its municipal department consists of 15 professionals, including four portfolio managers, five analysts, and three traders.

SteinRoe, a unit of Liberty, has four tax-exempt funds. Three are mutual funds and one is a money market fund. AsSets of the funds totaled $1.4 billion as of August, according to Financial Research Corp. of Chicago.

Liberty Asset Management has two municipal bond funds whose assets totaled about $306 million as of August.

Colonial funds are load funds which carry a sales charge for.investing. The funds will continue to be sold with the sales fees, said Rob Coburn, a spokesman.

"We don't anticipate any changes to the funds," Coburn said. "We're going to be the big mutual fund group in Liberty Financial," he said.

"Colonial's strength is that we are an excellent money manager and have a diversified group of funds. Our expertise is in managing, distributing, and servicing" those funds, Coburn added.

Colonial benefits from the merger because it gains a stronger capital base and a connection to a more diversified company, Coburn said.

Through the merger, Colonial and Liberty expect to improve their bank distribution, said Charles O'Neill, executive vice president of marketing for Colonial Investment Services. Primarily, funds of both companies are now sold through brokers, O'Neill said. He declined to provide specifics.

Liberty Financial Cos. is a wholly owned subsidiary of Liberty Mutual Group. After the transaction, Liberty Mutual will own approximately 80% of the publicly traded shares of Liberty Financial Cos.

Founded in 1931, Colonial is the 29th largest mutual fund company in the United States, based on assets. Approximately 40% of the company's assets are in tax-exempt funds, the company said.

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