OC Duo Gain Allianz Assets, Plot Global Push
It was a hot Sunday afternoon last April when the top executives of Newport Beach-based PIMCO Advisors Holdings LP, one of the world’s best-known money management companies, boarded the Curlew, a 65-foot schooner. The host was CEO William Cvengros. Also on board were PIMCO bond guru William Gross and William Thompson Jr., head of PIMCO’s largest investment company.
They had chartered the sailboat, complete with the upscale Golden Truffle as its caterer, for a cruise of the Newport Beach coastline.
It was their first face-to-face meeting with six executives from the Munich, Germany-based insurance giant Allianz AG. If the two groups hit it off, it would lead to the creation of a company with more than $600 billion in assets under management. It would facilitate the entry of PIMCO into worldwide markets, particularly in Europe and Asia. It would help Allianz (pronounced Ah-lee-AHNCE) land the celebrated Gross and gain a big foothold in the United States. The short voyage was judged a success.
“The cruise was a chance to show them Newport Beach, a part of the world that they were very envious of,” said Thompson. “They knew all the facts about PIMCO. They just didn’t know the personalities and the chemistries. That’s what clicked, not only for them, but it also gave us a lot of confidence that we had the right partners.”
Seven months and many secret talks later, Allianz announced it would pay $3.3 billion for a 70% stake in PIMCO, with the other 30% being retained by Pacific Life, the Newport Beach-based company that originally spun off PIMCO Advisors. The deal is expected to be finalized late next month.
The story about the boat ride was one insight from an interview with Thompson and Gross, the top executives at Pacific Investment Management Co., who will now become the point men for Allianz’s efforts in America.
The merger, they said, is full speed ahead. Lawsuits challenging the deal have been settled. The late April closing date is a month behind the originally announced schedule, but Thompson and Gross said the slight delay was simply because things had moved a little more slowly than expected at the SEC. The delay, they said, is not because California State Insurance Commissioner Chuck Quackenbush threatened to hold up Allianz’s purchase because it allegedly wasn’t paying insurance benefits to some victims of the Holocaust. Quackenbush has backed off on his criticisms of Allianz and it was doubtful that he could have regulated the purchase because PIMCO is not in the insurance industry. Thompson and Gross said there are no expected obstacles to completing the deal.
When it is completed, PIMCO will gain greater access to global markets and become the bond machine for Allianz’s global growth plans.
Allianz is planning to shift its roughly $100 billion in fixed-income assets to Gross’ PIMCO operation, making Gross, who will be approaching $300 billion in assets under management, an even bigger bond king than he already is.
And that’s not all.
“Any asset that Allianz buys, PIMCO is the fixed income asset management entity,” said Thompson. “It’s a good opportunity to grow the assets in a meaningful way.”
Allianz is trying to grow aggressively. It has hired as CFO Paul Achleitner, a German who made a name for himself as a player in mergers and acquisitions, including Daimler Benz and Chrysler Corp., and the privatization of companies in the former East Germany after the German reunification.
After the merger, Allianz’ total assets, which includes its insurance business, is expected to be $660 billion.
PIMCO will retain its board of managing directors, which is expected to give it a degree of autonomy similar to what it enjoyed first under Pacific Life and then as a public company. And its operations will remain based in Newport Beach.
“We wanted to make sure that Allianz couldn’t reach in and change the successful formula that we’ve been able to use for the past 25 years,” said Gross. “We’re certainly not adopting the Allianz style of money management. The reason they are merging with us is because they consider PIMCO the top bond manager in the world. They’re adopting us in terms of our model, as opposed to vice versa.”
Since 1990, PIMCO’s assets have grown from $29 billion to $181 billion through a combination of increased marketing, especially to big institutional investors, the general investment boom and, above all, Gross’ heralded performance. His flagship Total Return Fund has produced an average 9.18% annual total return for the past 10 years, topping by 108 basis points the Lehman Brothers Aggregate Bond Index for that same period.
Gross said Allianz is going through what Pacific Life did about 20 years ago, trying to develop an asset-management business that to some extent is separate from the insurance side.
Already plans are afoot to leverage the PIMCO acquisition. A handful of PIMCO employees are being transferred to Munich to begin a fixed-income office for Europe, there are plans to open new offices in Asia in the next 12 to 18 months, and some Allianz employees will be assigned to Newport Beach to learn the PIMCO investment style.
According to a recent filing with the SEC, the executive officers and management board members of PIMCO Advisors who are continuing in the merged company are expected to receive over the next five years cash payments of $471 million and shares of Allianz worth $50 million.
“All the managing directors signed long-term management contracts,” said Thompson. “We structured this deal so that there would be substantial incentives for senior management and all employees over the next several years.”
It’s been reported that Allianz is paying Gross a $200 million package over five years; that was one topic he declined to discuss in the interview. Thompson’s package also is undisclosed.
One person who won’t be sticking around is PIMCO Advisors’ top executive, CEO Cvengros.
He is taking over as CEO of Packetvideo Corp., a small San Diego-based developer of software for multi-media transmission over wireless networks.
Gross said Cvengros departed because his role in the new company “would be diminished.” A PIMCO spokesman noted that with PIMCO losing its public company status, one of Cvengros’ fortes, investor relations, would no longer be needed.
“The new structure didn’t let him grow in his existing position,” said Gross. “We made every effort to accommodate Bill. He saw a better chance and took it.”
A call to Cvengros seeking comment was not returned.
PIMCO Advisors, which oversees more than $260 billion in assets, consists of seven subsidiaries, the main one being Pacific Investment Management Co. Gross oversees management of Pacific Investments’ more than $180 billion in funds; the flagship Total Return Fund, at $30 billion in assets, is the largest bond fund in the country.
The other units of PIMCO Advisors are: New York-based Oppenheimer Capital, Boston-based Cadence Capital Management; Seattle-based Parametric Portfolio Associates; Dallas-based NFJ Investment Group; New York-based PIMCO Equity Advisors; and Stamford, Conn.-based PIMCO Funds Distributors, which is responsible for marketing of PIMCO funds through brokerages to individual investors.
Pacific Investment Management Co. is the star of the group. It can trace its roots to the early 1970s, when it was a part of Newport Beach-based Pacific Mutual (now Pacific Life). In 1994, it became public through a reverse merger and its initials were used for the operating company. Thompson and Gross often use the name PIMCO to describe their activities; when they’re talking about the operating company, they say PIMCO Advisors.
That’s a distinction they won’t have to make much longer. With the completion of its purchase by Allianz, PIMCO Advisors will disappear and be replaced by a new holding company, Allianz Asset Management, created by Allianz A.G. to oversee its new PIMCO units. Allianz Asset Management is expected to have dual headquarters in Newport Beach and Munich.
Joachim Faber, the Alliance A.G. director in charge of asset management, is slated to become the CEO of Allianz Asset Management, and Thompson is expected to be the company’s president, while remaining CEO of PIMCO (Pacific Management).
Gross’ position on the organization chart will not change. He will continue to run the PIMCO funds and report to its managing board. The two men kidded about Gross’ exalted status in the company. When asked who Gross will report to under the new arrangement, Thompson quipped, “His wife.” Gross struck a quizzical pose and asked, “Who do I report to?”
Much speculation had swirled around whether Gross would stay put at PIMCO under new ownership. He said in the interview that his hope had always been to remain with the company.
“PIMCO was partly my baby from the beginning,” Gross said. “To me, it’s like a child. You don’t easily let go of a child at any point in time. The Allianz merger was recognition that we need to go global in terms of asset acquisition.”
At no time during the negotiations did the subject come up of moving PIMCO out of Newport Beach, said Gross and Thompson. There was some quibbling over who would serve on the boards; the final stock price for the sale was also an issue.
But Thompson and Gross both said the biggest issue was making sure that PIMCO retains autonomy.
PIMCO is set up like a law firm. It has a 19-member board of managing directors that includes Gross and Thompson, who is its chairman. Thompson takes care of business operations and marketing, while Gross is in charge of the investment decisions. Both men report to the board of managing directors.
Their sister subsidiaries have similar structures. PIMCO Advisors has functioned mainly as a service arm for the subsidiaries, handling human resources, payroll, legal and other functions.
Thompson said PIMCO began exploring two years ago how it could expand overseas.
“We believed that we could probably expand globally on our own, but the time and costs of doing that would be prohibitive,” said Thompson. “If you decide to open an office in Asia and it won’t be profitable for several years, that comes out of your shareholders’ pockets.
“Clearly having a global partner with offices around the world and with a desire to invest in the growth of the business made sense to us,” said Thompson.
“If we hadn’t had Allianz, we would have moved much more slowly globally. Our presence on the continent would probably have been five years from now instead of five months,” said Gross.
PIMCO executives sent out feelers through investment bankers. Henning Schulte-Noelle, chairman/CEO of Allianz, was very interested because PIMCO would allow him quick expansion into the U.S. market.
Yet, for all of the planned expansion, PIMCO expects a slowdown in its rate of payroll growth, which has averaged 20% to 25% over the past three years, to 1,200.
That is because technological innovations are streamlining back-office operations, a company official said.
Thompson and Gross now are focused on life under a new owner.
“We certainly could see the day when we top a trillion dollars, but that’s down the road a few years,” said Thompson. “But you know growth and size is not the name of the game. You have to deliver results. We were convinced that they saw the business the way we do, that if you don’t deliver value to your clients, there is no reason for being in the game. They endorsed that. They were enthusiastic about the depth of talent at PIMCO. In each of the key areas of our company, we have tremendous bench strength of people coming up through the ranks, so we think the future of the company is very bright.”
PIMCO Advisors’ ticker symbol of PA will soon disappear from the New York Stock Exchange. But Allianz, publicly traded in Germany, will soon seek a listing on the NYSE, Thompson said.
“There always was a special appeal to see your stock listed and traded on a daily basis,” said Gross. “It’s sort of a report card for your company on an ongoing basis. To lose that is to lose a daily highlight. On the other hand, we have Allianz to look at. We’ll just have to punch out that ticker symbol instead of the old PA.” n
Gross Says OC, Facing Bankruptcy, Rejected Free Help from PIMCO
In the frantic hours before Orange County declared bankruptcy in December 1994, OC citizen William Gross, widely recognized as one of the world’s leading experts on bonds, said that he and other officials of Newport Beach-based PIMCO offered their services to the county free of charge.
But county officials did little more with the offer than pick Gross’ brain for a few minutes before going elsewhere for high-priced assistance.
“The powers that be in Orange County were talking to us in terms of what we recommended and what we thought would help,” said Gross. “We offered our ideas and services free of charge but they decided to go to Wall Street. I’m not sure if that was ultimately the best decision because PIMCO could have done a wonderful job.”
Gross said he that, in particular, PIMCO could have helped the county to sell its bonds, and PIMCO would have waived the fees.
Gross said he doesn’t remember exactly who he talked with from the county, but he sensed there was a power vacuum.
“It was hard to know who were the key players making the decisions. I do know that we felt we had the responsibility to Orange County to get them out of this mess because we are residents and we felt it important to have a thriving community to operate and live in,” said Gross. “We tried to help, but weren’t called upon.”
Gross said he did have some idea of what Bob Citron was up to before the collapse of the county’s investment pool.
PIMCO manages funds for the Orange County Employees Retirement System. At one point in the early ’90s he considered investing some of the funds in Citron’s short-term money-market account.
“We investigated that money-market fund before 1994,” he said. “We came to the conclusion long before 1994 that it was a leveraged fund with a high degree of risk and therefore we would not invest it. From that standpoint, we were aware of a part of what was going on.”
Bill Gross, Superstar
Bill Gross insists he can’t move the bond market,no fund manager is that powerful,but if somebody wants to ascribe to him that level of influence, well, what can he do about it?
“If some people think PIMCO moves the market, that’s fine, because we’ll get additional clients down the road,” Gross says.
Then again, Gross does have something that even Federal Reserve Chairman Alan Greenspan doesn’t,his own television studio. It allows PIMCO’s chief investment officer to give his many media interviews without having to stray from his Newport Beach office, where he manages close to $200 billion of other people’s money.
Gross is in high demand on Wall Street, where he is widely celebrated as an investment guru and has been dubbed the “Baron of Bonds.” Appeasing that demand by giving interviews to business journalists is an integral part of PIMCO’s marketing effort, giving the company valuable exposure in the investment community.
Gross’ observations and predictions are also distributed by PIMCO itself, on its website and through newsletters.
The irony in this is that Gross is a shy person, uncomfortable with small talk. But his results speak for themselves.
Gross’ flagship Total Return Performance has beaten the benchmark Lehman Brothers Aggregate Bond Index for five straight years. However, the bond market didn’t perform well in 1999, and his fund declined 0.4%, before expenses, compared to a 0.8% decline for the index.
“We have had a bear market for 14 to 15 months now,” said Gross. “That’s typical of bear market cycles in the United States and I think it shouldn’t be long before the bond market sees a bit of sunshine instead of the clouds we have had. That doesn’t mean bonds are in a bull market, but I think most bonds will have seen their peaks in yield. For PIMCO and our clients, that means a return to 7% or 8% a year, rather than zero, which the bond market experienced last year. That should bring a smile to the faces of clients who aren’t used to prices going down.”
Gross said the stock market is not his specialty, but he ventured an opinion on what’s happening.
“My sense is that Greenspan has targeted the stock markets, not so they won’t go down, but to keep them from going up. He’ll continue to raise rates until the NASDAQ and the S & P; shows some signs of cooling off. We’re in that process right now.”
This year, he’s weighting more heavily in mortgages and in minor portions of emerging market debt because the global recovery is positive for emerging nations at the perimeter of an improving Europe and reviving Japan.
DOERS’ PROFILES
WILLIAM S. THOMPSON, JR.
Title: CEO, Pacific Investment Management Co.
Education: Bachelor’s in engineering, University of Missouri, Columbia; MBA, Harvard.
Career: Spent 18 years with Salomon Brothers, including two in Tokyo as chairman of Salomon Brothers, Asia Ltd. Joined PIMCO, 1993. Chairman of Hoag Hospital Foundation.
Residence: Irvine Cove, north of Laguna Beach
Family: Wife Nancy. Three children: William III, 27, MBA student at the University of Chicago; Emily, 25, employee at AltaVista in San Francisco; and Brad, 21, studying political science at the University of Oregon.
Hobbies: Golf (14 handicap).
WILLIAM H. GROSS
Title: Co-founder, chief investment officer, Pacific Investment Management Co.
Education: Bachelor’s degree, Duke University; MBA, UCLA.
Career: Has spent 28 years with Pacific Investment Management Company; authored “Everything You’ve Heard About Investing is Wrong.”
Family: Wife Sue; three children: Nick 11, and two in their 20s, Jeff, a sports photographer (had recent pictures in New York Times) and Jennifer, an aspiring actress.
Hobbies: Classical music, stamp collecting.
