Power Financial to pay $3.9b for Putnam and keep it intact

Canadian financial services giant Power Financial Corp. yesterday said it will pay $3.9 billion to buy Putnam Investments and keep it intact, a deal that solidifies Boston's position as a mutual fund industry center.

Power will pay cash to Putnam's parent, Marsh & McLennan Cos. of New York, which said its Putnam unit in Boston, which traces its roots back to 1937, no longer fits its focus on human resources and insurance.

Power has run out of room to expand in Canada and is buying Putnam as a quick way into the US market. In an interview yesterday at Putnam's Post Office Square headquarters, Power chief executive R. Jeffrey Orr said Putnam would continue as a stand-alone company under the leadership of Charles E. Haldeman Jr., and that it is poised for a comeback after years of poor performance and withdrawals by investors.

"We come here to buy Putnam for Putnam, as a stand-alone entity," Orr said.

Asked whether layoffs would occur among Putnam's workforce of 2,600, largely in Massachusetts, Orr and Haldeman both noted Putnam has shed more than half its workforce since 2003, and that they would continue reviewing staff levels. But both said there were no major areas of overlap since Power has no similar operations. "In terms of combining Putnam with other operations, it is not possible," Orr said. Going forward, Haldeman said, the new backing from Power should help his business. "Now that we have stability in ownership, we think there are many clients who were considering coming to Putnam, who put it on hold until there was resolution of this issue," he said. Now, he said, "we think there's likely to be acceleration."

With $192 billion in assets under management, Putnam is no longer one of the giants of the local fund industry that it was at the start of the decade when it managed more than twice as much money. Meanwhile, new types of financial services companies have grown up locally including hedge fund and private equity firms, keeping the industry's total employment in Massachusetts around 46,000 in recent years.

But fund industry specialists had still seen the sale process involving Putnam as a test of whether an outside company would find the company valuable and called the outcome encouraging.

"Had this gone another way it would have sucked the life out of Putnam," said Don Sowa, a Rhode Island financial planner who directs clients to some Putnam funds. "We could have seen a major player being broken up and sold off for its parts."

Putnam's performance has improved of late and in October it reported the first month in years in which investors put more money into its funds than they withdrew. Reginald Laing, analyst for Chicago research companyMorningstar.com, said the deal adds some predictability to Putnam's future that could reassure investors. But Putnam still faces challenges like retaining managers at its hot international funds.

Max Rottersman, publisher of fundr2.com, an industry newsletter in Hanover, N.H., said $3.9 billion represents a low valuation of Putnam as a percentage of its total assets under management, and that compared to peers like T. Rowe Price Group, Putnam could be worth at least $4.6 billion.

Marsh & McLennan chief executive Michael Cherkasky said in an interview his company received more than 30 inquiries and seven serious bids for Putnam, but that Power's was the highest among two finalists. Compared to peer fund companies Putnam was not as valuable, he said.

Though the deal's outlines were publicly reported at the end of December, Orr and Putnam funds trustee chairman John Hill said it took another month mainly to hash out the long-term compensation structure for Haldeman and about 250 other Putnam personnel who hold 11 percent of its equity. If the deal is approved by regulators and Putnam shareholders, management's stake will drop to 4 percent of the Canadian-owned Putnam. They will also be eligible for payouts totaling millions of dollars, according to filings.

The Putnam sale process was unusual in that the board that oversees Putnam's 107 funds for roughly 10 million shareholders took on a highly active role in picking the winner. In the fall Hill said publicly that bidders would be judged on whether they would keep the company and its leadership intact. "We didn't care about the price, we cared about the stability of the brand name and the portfolio," he said.

Through the sale process there have been suggestions that Haldeman and other managers could buy the company themselves through debt and other instruments. Yesterday, Haldeman said he never pursued such a deal because it could have put his interests at odds with those of Putnam shareholders.

Putnam was founded in 1937 by George Putnam Sr., who created one of the first mutual funds to offer both stocks and bonds. Marsh & McLennan bought the company in 1970, but came under pressure to sell it in recent years after a series of trading scandals starting in 2003. Putnam paid $100 million in penalties and $10 million in restitution to settle charges brought by state and federal regulators that it failed to properly oversee its operations.

Marsh & McLennan will remain a force in Greater Boston through its Kroll investigations and Mercer consulting units, which together employ about 1,000 people in Massachusetts. Marsh & McLennan shares rose 44 cents to $29.94 on the New York Stock Exchange.

Ross Kerber can be reached at kerber@globe.com.