FEDERATED SETTING IPO PACE: OTHER FIRMS WATCHING TO SEE IF NOW’S THE TIME TO TAKE STOCK TO MARKET

Federated Investors is set to become one of the largest mutual fund companies to go public in a decade.

The nation’s 10th largest fund firm, with $92.5 billion in assets, hopes to raise at least $250 million in an offering of an undisclosed number of shares slated for May, according to public documents.

A host of other investment firms also have sold stakes recently, typically to bigger companies, enabling their founders to cash in their chips. Pittsburgh-based Federated also may be positioning itself to eventually be acquired, by putting a price tag on its value during a lofty market.

For now though, it’s expected to use its stock as currency to continue its own acquisition binge.

“On the heels of three consecutive outstanding years in terms of performance, Federated is thinking the timing is right,” says Matt Beaudry, a senior consultant at Financial Research Corp., a Boston-based mutual fund consulting firm.

A strong response to the offering would likely prompt more fund companies to go public. Indeed, late last year three asset-management firms did IPOs. But Federated faces at least two obstacles: It’s not a household name, and much of its assets are in low-margin money market funds.

While investment performance has been strong, Federated’s mutual fund market share has slipped to 1.9%, from 3.5% in 1990. But its assets under management rose steadily during the past decade, gaining 23.6% in 1997 alone to $92.5 billion. Last year, the mutual funds had net sales of $1.3 billion, up from $175 million in 1996.

“Net sales increased every quarter in 1997. If you overlay the macroeconomic trends in the marketplace vs. what’s happening at Federated, it seems like a real opportune time for an IPO,” says Mr. Beaudry.

Indeed, many of the company’s top executives stand to profit handsomely. Its founder and chief executive officer, John F. Donahue, who earned $1.6 million last year, owns a 12.6% stake in the firm. His son, J. Christopher Donahue,Federated’s president and chief operating officer, is the second-largest shareholder, with a 7.2% stake, says the firm’s filing with the Securities and Exchange Commission.

All told, Federated’s top executives and directors own 36.7% of the company. Even after the IPO, the Donahue family will continue to control 100% of the voting shares.

Federated officials won’t comment on the upcoming deal during its “quiet period,” but the IPO should do well if a recent deal by Waddell & Reed Asset Management is any indication.

When it went public in March, Overland Park, Ks.-based Waddell & Reed, a $23 billion fund company spun off from insurer Torchmark Corp., had a market valuation of $1.7 billion. The IPO was priced at $23 a share, higher than the projected $20 to $22, raising $499 million. Since the deal, shares have traded in the $25 range.

“(Waddell) was priced reasonably and was oversubscribed,” says Bruce Brewington, an equity analyst at San Francisco-based Putnam Lovell & Thornton. “A lot of people are interested in participating in the asset management sector.”

appeal in doubt

The seven offerings in the financial services market this year are up 21% on average, according to IPO Monitor, a tracking service based in Calabasas, Calif. Financial services funds were the best performing sector funds for the 12-month period ended March 31, returning 57.2%, compared to 48% for the Standard & Poor’s 500 stock index, according to CDA/Wiesenberger Inc., a mutual fund information provider in Rockville, Md.

But Federated may not appeal to every investor since about two-thirds of its assets, $63.6 billion, is in money market funds. Indeed, it’s one of the nation’s largest managers of such funds, which generate about half the fee income of equity funds.

Federated is working to bolster its long-term sales. It sells its 80 load funds primarily through banks and broker-dealers and also directly to retirement plans.

steady, not sexy

It has set an ambitious goal to boost international assets to $10 billion by the year 2000, according to FRC. At the end of December, it had $870 million.

Its stock funds totaled $11.7 billion in 1997, up 54% from 1996. In 1996 and 1997 it bought three mutual fund firms, including Wyomissing, Pa.-based William Penn Co. In all, the acquisitions added $548 million in assets.

Federated also is a leading provider of administration services to banks. That’s not the sexiest-sounding business but it can offer a steady stream of revenues in a bear market, observers say.

Still, some portfolio managers aren’t yet salivating over the stock offering since despite the firm’s size, Federated isn’t well known among retail investors. “Our firm is focusing on mutual funds with very, very strong brand names and consumer recognition,” says Joseph Stechler, partner at Stechler & Co., a hedge fund and pension fund manager in Englewood, N.J.

Howard Kapiloff contributed to this story.