O.C.’s Pimco to Sell 70% Stake to German Firm

Pimco Advisors Holdings LP, one of the world’s largest bond managers, agreed Sunday to sell a 70% stake in the company to Europe’s second-largest insurer in a $3.3-billion deal that is likely to spur similar marriages between U.S. and foreign financial giants.

Ending months of speculation, Newport Beach-based Pimco said it signed a definitive agreement to sell majority ownership to Munich, Germany-based Allianz AG for $38.75 a unit in cash, valuing the entire company at $4.7 billion.

The $3.3-billion price tag is the second-highest amount ever paid for an Orange County company, following the $3.9-billion acquisition in January of Costa Mesa-based Avco Financial by Associates First Capital.

Pimco’s well-respected fixed-income unit, headed by star bond manager William “Bill� Gross, will remain based in Newport Beach. Gross will continue to run Pimco’s bond investments under a new, long-term employment contract, which will include a profit-sharing agreement and a retention compensation plan through 2006.

It was unclear whether Pimco Chief Executive William Cvengros would remain with the company. About five top Pimco managers will relocate to Munich as part of the deal, but no layoffs are expected.
Pimco employs about 1,200 worldwide, including 585 in Orange County.

The sale will bring handsome paydays to several top Pimco managers, who together are selling their 22% stake in the company. Based on the $38.75-a-unit sale price, Gross’ holdings would be worth more than $26 million and Cvengros’ stake would be valued at about $8 million.

Newport Beach-based Pacific Life Insurance, which spun off Pimco in 1994, is keeping its 30% stake in the company.

“We are optimistic about Pimco’s future and feel very positive about our continued investment in the company,� Pacific Life Chairman Thomas C. Sutton said.

The combined companies, to be headquartered in Munich, would have about $650 billion in assets under management and about 107,000 employees worldwide. The deal--subject to regulatory and shareholder approval--is expected to be completed by March 2000.

Analysts said it was unlikely that Allianz would make substantial changes in the day-to-day operations of Pimco or risk alienating its key managers in Newport Beach.

“This isn’t like a bank merger, where they come in and close a bunch of branches,� said Mark Constant, analyst at Lehman Brothers in San Francisco. “There’s no faster way to pour money down the drain than to pay big bucks for a people business and then drive all the people away. I’m sure both companies are interested in retaining the culture and autonomy of Pimco and allowing it to flourish.�

First Assignment: the Culture Clash

Nevertheless, one of the biggest challenges to the deal will be resolving differences in culture and style, particularly for Pimco managers, who will be reporting for the first time to a German-based corporate parent.

“Culture is going to be key,� said Lloyd Greif, president of Greif & Co., a Los Angeles-based investment bank. “There are going to be differences in perspectives, and some problems will be inevitable.�

Underscoring Allianz’s respect for Pimco’s bond expertise, the Newport Beach company will take over an additional $100 billion in assets from Allianz and operate them under the Pimco name.

The purchase is the latest example of global consolidation in the financial services industry, analysts said.

“The global market offers tremendous potential,� said Philadelphia mutual fund consultant Burton Greenwald, who predicted similar cross-border deals will follow the Pimco-Allianz merger.

Both Pimco and Allianz, which began merger discussions last year, have been actively seeking international partners to boost their sales worldwide.
“This will give us access and experience in 68 countries,� said Ernest Schmider, Pimco’s chief administrative officer.

For Pimco, the Allianz deal fast-tracks the company’s diversification away from the maturing U.S. market and provides a deep-pocketed parent that can help it sell products around the world. Over the next five years, Pimco has said, it would like to boost the amount of money the company manages on behalf of non-U.S. clients from about 6% of total assets to 20%. Currently, Pimco manages about $256 billion in assets.

As growth in the U.S. mutual fund market begins to slow, investment companies increasingly are turning to untapped markets abroad, particularly with the privatization of large pension funds in Europe and elsewhere, according to Greenwald, head of B.J. Greenwald Associates. Teaming with Allianz puts Pimco in a better position to pick up some of that business, he said.

Allianz Has Plans for Asset Management

For its part, Allianz gets a well-respected U.S. bond manager that will serve as a foothold for expansion in the U.S. A key attraction is Pimco’s fixed-income unit, Pacific Investment Management Co., which accounts for about two-thirds of the company’s assets, and its industry-leading Total Return Fund, run by Gross.