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Primecap Management Scraps Plans for Sale, Sources Say

CALIFORNIA / News and Insight on Business in the
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Financial services: Prospective buyers are said to have submitted low bids for the Pasadena company.

December 02, 1998| From Bloomberg News

Primecap Management Co., which manages about $14 billion in stocks, including $10 billion for Vanguard Group, decided to shelve plans to sell itself, two people familiar with the situation said.

Primecap executives decided against a sale after receiving low bids from prospective buyers, the people said. The bids were low in part because prospective buyers were concerned about Primecap's reliance on Vanguard for most of its business and the low fees paid for managing the Vanguard Primecap Fund, they said.

Officials at Pasadena-based Primecap didn't return calls seeking comment.

Bids for the company were due three weeks ago. Some industry analysts said the relatively low fees Primecap earns for managing Vanguard funds indicate the firm was offered less than the 3% to 3.5% of assets paid recently for other institutional money managers.

Primecap's annual revenue is $45 million to $65 million, based on about $23 million in fees paid by Vanguard and industry estimates of one-half of 1% to 1% received for managing other institutional equity accounts.

Some industry observers have speculated that Vanguard might pull all or part of its assets from Primecap if the firm were sold to a competitor.

"The uncertainty about the Vanguard account may have been sufficient to discourage potential buyers from paying the price Primecap thinks it's worth," said Geoff Bobroff, an independent industry consultant in East Greenwich, R.I.

"We in no way try to influence an external advisor on whether to sell," said Vanguard spokesman John Demming. "If a transaction occurs, we would evaluate it based on the long-term interests of our shareholders."

Vanguard dismissed Batterymarch Financial Management Corp. as manager of one of its mutual funds in 1996, a year after the Boston firm was acquired by Legg Mason Inc.

At the time, Valley Forge, Pa.-based Vanguard said Batterymarch was fired because of poor performance. Still, Vanguard stuck with Batterymarch as manager of the portfolio, since renamed the Vanguard International Value Fund, during a period before the sale when performance declined and the firm lost key portfolio managers.

Primecap is led by a team that includes co-founder Howard Schow, 71, Theo Kolokotrones, the firm's president, and Mitchell Milias, vice chairman.

"Something will still have to be done about succession planning," Bobroff said.

About 70% of closely held asset-management firms expect ownership changes during the next five years, largely because their owners are getting older and need to plan for succession, according to a survey by Boston-based Downer & Co.

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