Fleet Financial Group, which won the bidding last month to buy the mutual fund business of International Business Machines Corp., may be in for a bitter fight with a disappointed rival.

The Vanguard Group, the nation's second-largest mutual fund company, is crying foul over the $14 million deal for the five IBM Funds, which hold $650 million in assets. John C. Bogle, Vanguard's chairman, has changed that the transaction will line IBM's pockets at the expense of the fund's 70,000 investors.

Officials at Fleet and IBM are defending the transaction, and they say it will proceed. A vote by the fund's shareholders is expected by June 15.

Competition for Assets

But the spat, which came to light in press reports last week, makes clear that banks face some formidable competition in the race to build mutual fund assets through acquisition.

"There are an awful lot of very good players out there, and banks have to be aware of how tough the competition is," said John Teall, an analyst with Lipper Analytical Services Inc., Summit, N.J.

Mr. Bogle, who presides over a $125 billion-asset fund company, is certainly a worth opponent for Fleet.

Relative Newcomer

An outspoken man of 64, he has spent 43 years in the fund industry, including 24 years as chairman of Vanguard, which is based in Valley forge, Pa.

In contrast, Fleet, a $48 billion-asset company in Providence, R.I., is relativele new to the fund business, and manages just $3.9 billion in fund assets.

Thus, it is no surprise that Mr. Bogle's charge that IBM presided over an "unseemly bidding contest" is capturing attention.

Mr. Bogle's bottom line is that Vanguard's $10 million offer would have been the better deal for IBM Funds shareholders. The funds' trustees had a duty to place shareholders' interests ahead of IBM's but failed to live up to the obligation, he maintained.

Instead, "the funds were put on the block to be sold to the highest bidder," Mr. Bogle said in a telephone interview. Vanguard was among eight companies that bid for the funds.

Mr. Bogle said he was meeting with Vanguard executives to weight the launch of a proxy battle for control of the IBM Funds.

But Fleet is digging in its heels. "I love a good fight," said Richard Jones, president of Fleet's Investment Services unit. The IBM Funds would become part of Fleet's Galaxy Funds, which the units manages.

Mr. Bogle said Vanguard can save investors money by managing the four IBM index funds as part of Vanguard's existing index-fund stable, Mr. Bogle said.

Less Costly to Manage

Because stock picking isn't an important part of the job, these products are less costly to manage than most mutual funds. And Vanguard, which is known for its penny-pinching ways, created index funds in 1976 and now manages more than $12 billion of such funds.

The only way to improve returns on index funds is to operate them with as little administrative expense as possible, and Vanguard is prepared to do that, Mr. Bogle said. He questioned whether Fleet could run the funds as efficiently.

The sale to Fleet fits IBM's strategy of raising money by shedding nonessential units. But the company maintains that the choice of Fleet was not made at the expense of investors.

Concessions by Fleet

As part of the deal, Fleet agreed to waive certain fund fees and to make its banking and brokerage services available to IBM Fund investors. For most fund investors, Fleet's offer has cost advantages over Vanguard's, said a spokesman for IBM Credit Corp.

Still, industry observers said Vanguard's threat should be taken seriously.

If Vanguard wanted to go after the IBM Funds, from an economic standpoint, there is very little Fleet could do," said Lou Harvey, president of Dalbar Financial Services, Boston.

Mr. Harvey said Fleet might want to "make a phone call to Vanguard, to see if John Bogle is serious."

Mr. Jones of Fleet scoffed at the suggestion. "Why should I?" he said. "It's business as usual here. I expect it to be completed. "

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