Taking its mutual fund strategy in a new direction, J.P. Morgan & Co. announced Wednesday that it is paying $900 million for a stake in a highly regarded manager of retail and retirement funds.
The deal for 45% of American Century Investments, a Kansas City, Mo., firm with $60 billion of fund assets under management, had been anticipated since late June.
The partnership signals a growing interest in the retail mutual fund business on the part of Morgan, which has traditionally focused on managing money for large corporations and wealthy individuals.
American Century is renowned for its aggressive-growth equity funds and technological savvy-both seen as keys to expansion in the funds business, particularly in the retirement plan sector.
"Our business partnership with American Century will accelerate the growth of our asset management business, a key goal for Morgan," Morgan chairman Douglas A. Warner 3d said in a prepared statement. "It gives J.P. Morgan an opportunity to participate in the growth and promise of a very successful mutual fund family."
Morgan said the all-cash transaction-slated to close in four to six months, pending regulatory and board approval-would dilute reported earnings until 2000.
"We're trading near-term capital strength for additional stability and quality of earnings over the long term," said Bridget Smith, a Morgan spokeswoman.
Some observers called the pairing a solid fit and a model for further mergers between banks and fund companies.
"The partnerships between organizations with complementary skills, both technically and on the investment-capability side, was a great match," said Adele Heller, director of RogersCasey, a Darien, Conn., consulting firm that specializes in the retirement business.
Morgan wants "to remain preeminent," said Charles B. Wendel, president of Financial Institutions Consulting, New York. The transaction would allow the bank "to compete better with Fidelity, Merrill Lynch and other mutual fund companies. It gives them a much stronger product offering."
But others raised doubts.
The deal prompted Moody's Investors Service to place Morgan's long-term senior debt ratings-Aa2 for the parent and Aa1 for subsidiary Morgan Guaranty Trust Co.-on review for possible downgrade. Moody's noted that the deal adds approximately $750 million of goodwill to Morgan's assets.
And one expert maintained that while a combined Morgan and American Century would have $21 billion in retirement plan assets, it would still be well behind the market leaders.
"This is an area that both Fidelity and Merrill Lynch have spent hundreds of millions of dollars on," said A. Michael Lipper, president of Lipper Analytical Services, Summit, N.J.
But James E. Stowers 3d, American Century's founder and chief executive officer, said he was confident the company could compete. He noted that American Century has been building up its retirement plan services since 1991.
The fund company's retirement services chief, Tom Kmak, said spending for technology has totaled "tens of millions of dollars" and will grow 30% with Morgan's involvement.
The heart of the arrangement calls for Morgan and American Century to sell each other's mutual funds and build a full-service 401(k) plan business together.
"We'd like to make sure we have the full lineup of funds from the very conservative to the most aggressive, both domestic and international," Mr. Stowers said in a telephone interview.
Morgan has an option to increase its investment in American Century, but for now it thinks a minority stake is the way to go, said spokesman Joseph Evangelisti. "We believe the independence of the company has been critical to its success, so this structure is what makes best sense to us."
Under the arrangement, Morgan-which manages $9 billion in retirement plan assets-will use American Century for record keeping and investor communications services. Currently, its 401(k) plan clients pick record keepers and plan servicers on their own.
American Century manages $12 billion of retirement plan assets. Its record keeping business serves 300,000 plan participants with $4.5 billion of assets. Its 175 corporate plan sponsors are middle-market companies, while J.P. Morgan has traditionally catered to blue-chip firms.
"It allows Morgan to expand their name and reputation to a broader audience," said R. Harold Schroeder, senior equity analyst with Keefe, Bruyette & Woods, New York, who added that the value of the deal and its impact on revenue would not be evident for years.
Two Morgan executives-Ramon de Oliveira, chairman of the firm's asset management business, and managing director Edward J. Kelly 3d-will join the American Century board of directors. Mr. Stowers and his family will retain voting control.
