Humdrum, Humble And Now A Real HeavyweightJeffrey M. Laderman
The Johnson family isn't as famous as the exotic, globetrotting John M. Templeton. But the dynasty, which controls Franklin Resources Inc., has earned a considerable fortune by selling Franklin mutual funds, which are chock full of the most humdrum of investments--U.S. government securities or municipal bonds. Now, with their deal to buy Templeton's company, Templeton, Galbraith & Hansberger, for $913 million, the Johnsons have shown that prosaic can pay off big.
With the Templeton acquisition, Franklin will jump ahead of Dreyfus Corp. to the No. 4 spot on the roster of big mutual-fund companies--with $72.4 billion in U.S. registered mutual funds (chart). Roll in Templeton's closed-end funds, offshore funds, and separate accounts, and the combined company will control some $87.8 billion in assets. Indeed, all by itself, Franklin controls about $61 billion in assets, making it one of the powerhouses of fund companies.
QUICK DECISION. Franklin management says it will run Templeton as a separate subsidiary. Indeed, there is little overlap between the two mutual-fund families, since Templeton's investments center around equities. But both companies have the same distribution channels: Each sells funds with up-front sales charges through brokers and financial planners. In time, the merger should allow shareholders of each fund family to move investments between the two without paying a second load. That will help shareholders diversify their holdings.
That's the key reason Franklin did the deal. With the Templeton acquisition, Franklin will now have overseas funds to sell at home and a selling network overseas for its own funds. "When we heard Templeton was interested in selling, it took about 15 seconds for us to get interested," says Charles E. Johnson, son of the chairman, grandson of the founder, and the senior vice-president who negotiated the deal. "To be important in the fund industry over the next decade, you have to go global."
Wall Street must agree. When the deal was announced on July 31, Franklin's shares shot up more than 10%, to nearly 30. That raised its total market capitalization to nearly $2.3 billion--more than 50% greater than Dreyfus, the next-largest publicly traded fund company (chart). "The market's reaction vindicates our analysis that this is a powerful strategic fit," Johnson says.
Franklin investors learned long ago not to second-guess the Johnsons, who own about half the company's stock. "Franklin never blows its horn very much," says Robert F. McCullough, whose San Francisco money-management firm McCullough, Andrews & Cappiello Inc. is the largest nonfamily shareholder. "But it does an outstanding job."
McCullough began buying Franklin in the early 1980s at a price, adjusted for stock splits, of a mere 11 a share. Lee Munder, whose Munder Capital Management is another major institutional shareholder in the fund, also raves about Franklin. "How many companies do you know that have a compounded annual earnings growth rate of 39%, a 27% return on equity, and sells at a p-e ratio no greater than the stock market?"
Much of the fund's success comes from Franklin's marketing prowess. In the early 1980s, when most fund companies were preparing for an onslaught in equity funds, the Johnsons figured the big boom would come in fixed-income funds. The company was a pioneer in offering mortgage-backed securities and single-state municipal bond funds. Today, it boasts the largest government securities fund and the largest California and New York muni bond funds.
`BRAND NAME.' The Johnsons are willing to spend to get what they want. The price for Templeton, when measured as a percent of assets or a multiple of revenues--the traditional valuation yardsticks in the money-management business--is a little high. But this isn't just any old fund company. "Templeton is a unique brand name," says A. Michael Lipper of Lipper Analytical Services Inc. "It's worth a premium."
Besides, Franklin can afford to pay a premium price. The pro forma financial statements indicate the combination of the two would have enhanced profits by about 8%. And Franklin is a financial powerhouse: It has almost no debt and some $370 million in cash and other liquid investments. To finance the deal, Chemical Bank is providing $360 million in loans. An additional $150 million in subordinated debentures is coming from Hellman & Friedman, an investment bank. Templeton and some principal shareholders are even kicking in $75 million to buy restricted Franklin stock.
That shows Templeton still has an eye for a good investment. While the fund industry has grown fivefold over the past decade, Franklin's total assets under management have grown by more than 3,000%. Its stock price has surged by more than 42,000%. That kind of performance makes humdrum investing look quite exhilarating.