Deals Signal Rush Toward Larger Funds Mutual-Fund Managers See Salvation In Consolidation

Some of the biggest names in the mutual-fund business just grew bigger.

Hoping to beat rivals to the punch, Morgan Stanley Group Inc., Merrill Lynch & Co. and Franklin Resources Inc. paid a total of more than $2 billion in the past two days for some of the most famous families of mutual funds.

The deals reflect a growing recognition that offering investors a broad array of fund choices is key to surviving in today’s fiercely competitive business. Moreover, the eagerness to pay what analysts consider dear prices shows concern that choice properties are going fast.

In short, it’s a seller’s market.

“The buyers have raised the prices to attract the sellers. None of the companies that were sold had to be sold,” said Michael Lipper, president of Lipper Analytical Securities Inc., a mutualfund research company.

For investors, the trend toward large fund families could make it easier for them to buy different types of funds without switching companies.

The newly merged companies aren’t likely to shutter any funds or fire investment managers. That’s because the deals include some of the best-performing mutual funds around.

On Tuesday, for example, Franklin Resources agreed to buy famed investor Michael Price’s Heine Securities Inc. for as much as $800 million.

Price said the managers of his Mutual Series funds will stay on and their investment strategy will remain autonomous. His four funds - Mutual Beacon, Mutual Discovery, Mutual Qualified and Mutual Shares - are all given the top five-star rating for performance by Morningstar Inc., the Chicago-based fund research service.

Indeed, the deal boosts Price’s already high profile in the investment business. Known as a pugnacious and sometimes daring investor, Price pushed for Chase Manhattan Corp. to merge with Chemical Banking Corp. The deal gave Price a nearly $84 million one-day gain for his mutual funds.

For companies, the rush to merge is driven by a hope to rein in the cost of peddling mutual funds to Americans.

In recent years, a growing number of funds vying for investors has driven up the price of getting attention. Fund companies now sell more than 7,500 mutual funds - managing a record $2.64 trillion in individuals’ money in stocks, bonds and other securities.

For instance, Franklin’s network of brokers and other resources will introduce new customers to Heine’s four mutual funds, while Franklin increases its stock-fund assets under management, enhancing its position as the fifth-largest fund company with over $162 billion in assets.

Franklin also hopes to boost its share of retirement accounts, a big area for Heine’s funds.

Similar cost savings could result from Morgan Stanley’s purchase of Van Kampen American Capital Inc. for $1.18 billion in cash and debt and Merrill Lynch’s acquisition of Hotchkis & Wiley, a Los Angeles money-management firm, in a deal said to be worth nearly $200 million. The deals were announced Monday.

Further driving the trend are potentially big profits. Morgan Stanley, for example, already is a big manager of assets for large institutional investors, such as pension funds. But until now the company has been left to mostly watch competitors reap the larger profits from selling mutual funds to individual investors, who pay loftier sales fees.

Not everyone believes you have to be big to survive - especially smaller fund firms.

“Do I think you have to be a big guy to survive? I don’t think so,” said Lacy Herrmann, whose New Yorkbased Aquila Management Corp. manages $2.7 billion in funds, mostly single-state tax-free bond funds and money-market funds.

“I do strongly think you have to have a product niche and a strong position in that product niche,” Herrmann said.

If consolidations continue, one effect down the road presumably could be fewer funds for consumers to choose from, as newly merged companies combine similar-looking funds as a way to cut management and marketing costs.

For example, Smith Barney merged some of its funds with Shearson funds after merging with American Express Co.’s Shearson Lehman Brothers brokerage business in 1993.

But “at the moment, I do not see any negative for the investors,” Lipper said. “I think the good people will at least for some period still be very much involved.”

In Tuesday’s deal, Franklin Resources will pay Heine Securities $550 million in cash, along with 1.1 million shares of Franklin stock, worth about $64 million. In addition, Franklin agreed to pay up to $192.5 million more if Heine’s Mutual Series funds meet certain growth targets.