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Timing Is Everything : For GE, the Moment Appears Right to Dive Into a Mutual Fund


America is aging, retirement savings are growing, and the result is an investment boom that has enticed one of the world's largest finance companies into making an aggressive bid for one of the country's leading mutual-fund firms.

General Electric Capital Services' bid of $2.2 billion, or $55 per share, for Kemper Corp. demonstrates GE's conviction that the mutual fund industry will continue to be as much a growth industry over the coming years as it has been over the last decade, analysts say.

Kemper, the nation's ninth-largest mutual fund company, also would put GE Capital into a one of the few sectors of the finance world where it does not have a strong position: individual asset management. As General Electric Chairman John F. Welch wrote to Kemper Chairman and Chief Executive Officer David B. Mathis on March 2, "Kemper would be the flagship of our major thrust in the asset management business."

Nevertheless, the Kemper board and Mathis--who has won widespread praise for his restructuring of the company--rejected the bid last Friday. So far, they have refused even to discuss it further with GE representatives, according to spokesmen for both sides.

"Our position is that this is a low-ball bid and they're attempting to steal the company," Steven Radis, a Kemper spokesman, said Wednesday.

GE has requested a list of Kemper shareholders, which it is entitled to receive, and has retained a proxy-solicitation firm to help present its offer directly to owners of Kemper stock. GE also has hinted that it might propose its own slate of directors at Kemper's annual meeting in May, during which four of the 11 board members--including Mathis--are up for election.

The bid comes against an expectation of continued growth in the mutual fund industry, where assets under management in stock and bond funds alone have more than sextupled to $1.4 trillion from $220 billion in 1985.

"You have an aging population, low interest rates, and a need for retirement funding," observed James P. Hanbury, an analyst at Wertheim Schroder Securities in New York. "And there are only 15 to 20 brand names in the (mutual-fund) business."

Among those, Kemper is one of the few publicly held mutual fund operations. With $30 billion under management in its 40 equity and bond funds, the company is an inviting target for a buyer such as GE seeking to swiftly reach a critical mass in the field.

Starting a mutual-fund business from scratch is particularly difficult, industry experts say, because many investors judge funds by comparing their five-year records. That places funds with shorter life spans at a competitive disadvantage.

"This business takes time to build," said John Rekenthaler of Morningstar Mutual Funds, the Chicago-based fund-rating service. "You just don't raise $30 billion in three to four years."

In those terms, GE's bid resembles at least one other recent mutual-fund deal--the 1992 acquisition of Templeton Funds by Franklin Resources. That $913-million transaction gave Franklin a foothold in the international-fund sector, where it was otherwise weak.

Indeed, a GE-Kemper deal would make a lot of sense, many analysts say.

GE Capital is one of the country's most successful and aggressive financial companies. Created in the 1930s to help Depression-strapped consumers finance their purchases of refrigerators and other General Electric appliances, it has grown into an institution that resembles a full-service bank and investment company--but is exempt from most conventional banking regulations.

GE Capital finances auto, truck, airplane, and computer leases; issues credit cards and provides other consumer financing; puts up money for merger deals; sells insurance, and brokers stock and bond transactions.

"They're probably the most profitable bank in the world," said Nicholas Heyman, an analyst for NatWest Securities.

GE Capital's Kidder, Peabody unit could absorb Kemper's securities brokerage arm--the product of a series of purchases of small regional brokerages in the early 1980s, including Bateman Eichler, Hill Richards of Los Angeles. From 1987 through 1992, that strategy generated $223 million in losses for Kemper, which has never made the securities unit a success.

Some observers also say GE's army of expert real estate executives may be able to squeeze more out of Kemper's burdensome portfolio of nonperforming real estate than Kemper has thus far. Over the last three years, Kemper has written down the properties to about 18% of their invested values, charging nearly $800 million against profits.

That has drawn raves from analysts tracking Kemper's long restructuring.

"We think that the significant deterioration of Kemper's real estate portfolio has finally ended, and we believe that the reported losses will decline," wrote Merrill Lynch analyst Allen Nadler in placing a buy recommendation on the stock last February.

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