Sale Puts Question Mark on Wells' 401(k) Plans

Wells Fargo & Co. and Nikko Securities Co. Ltd. cashed in on a seller's market with their deal to sell Wells Fargo Nikko Investment Advisors to Barclays PLC, analysts say - but the sale left a hole in Wells' 401(k) business.

Included in the sale announced this month was a highly regarded unit of Wells Fargo Bank that serves defined contribution plans.

The 401(k) market is poised to double over the next five years to $1.25 trillion. But it's not clear whether Wells plans to stay out of the high end end of the market, which the unit, called MasterWorks, serves.

Wells may be planning to form an alliance with Barclays to continue to offer services through MasterWorks. Or it may build up its own capabilities in-house again.

Wells Fargo declined to discuss its plans.

"MasterWorks is a very well known, distinguished service, and one of the better bank products for that market size," said George Walper, a principal at Spectrem Group in Chicago. "It's interesting that it was part of the sale. It leaves a product gap at Wells."

MasterWorks, which has $6.6 billion under management, provides bundled 401(k) products. The business performs investment management, record keeping, employee education, daily valuation, voice response systems, and other services for corporate 401(k) plans with over $50 million in assets.

Wells Fargo has offered MasterWorks since 1989, but several months ago began to consolidate the organization with Wells Nikko's defined contribution group.

The sale of MasterWorks represents a "fairly significant loss to the bank," said one consultant who requested anonymity.

However, Wells has another 401(k) service, called the Business Retirement Program, an unbundled product that provides investment management services to plans with $5 million to $10 million in assets. The fastest growth in the 401(k) market is expected to be in this segment.

Wells could expand this offering to serve larger plans, the consultant said.

Separately, Wall Street analysts said that the price of Wells Nikko confirmed that money management firms are enjoying a seller's market. However, they said that the money manager was too specialized a business to have much impact on the price at which other such firms might be sold.

The sale price of $440 million was "higher than you would expect, given that it is an institutional company and an indexed business," said Oscar Junquera, a managing director of PaineWebber Inc. The price is about three times pretax revenue of $155.6 million in 1994.

Such a price is in line with prices for other money management firms, but high for a company specializing in indexed funds, which generate lower fees than actively managed funds.

"There are 20 to 30 buyers for every seller" of money management firms, said James McKenzie, a partner at Spectrem Group in Los Angeles.

In fact, the value of a money management firm is in the eye of the beholder, observers said. Firms like Barclays, or Swiss Bank Corp., which earlier this year paid $750 million for Brinson Partners, are willing to pay a premium to gain visibility, critical mass, or a foothold in the U.S., said Adam Hodes, a banking analyst at Salomon Brothers Inc.

As for which money management firm might be the next acquisition target, analysts say that it's anyone's guess. Many companies, such as Vanguard or T. Rowe Price, are highly regarded but have given little indication they are willing to give up their autonomy, said Mr. McKenzie.

"Look for companies with broad shareholder bases and no single strong institutional shareholder," such as Pioneer Group or Eaton Vance Corp., based in Boston, said Mr. Junquera. Potential acquirers have an easier job of getting shareholder approval from such companies, he said.

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