GOING . . . GOING . . . WELL, MAYBE

Dick Strong says he’s going to sell his company. But he’s said that before the present crisis, and he has stayed in control. Could he walk away now from the company that has been his passion for so long?

By KATHLEEN GALLAGHER kgallagher@journalsentinel.com, Journal Sentinel

Sunday, January 25, 2004

Just because Richard S. Strong hired Goldman Sachs Group Inc. to explore selling Strong Capital Management Inc., people say a sale of the company is inevitable.

But Strong, who owns 90% of the company, has never been predictable.

And except for a memorable interview he gave Fortune magazine in November — in which he said he hadn’t slept for 53 days straight — Strong isn’t talking about the troubles he and his mutual fund company are in.

New York Attorney General Eliot Spitzer in early September implicated the firm in special treatment provided to a New Jersey hedge fund, treatment that wasn’t available to other shareholders. Two months later, Spitzer said Strong had traded in and out of his firm’s funds and suggested he was considering taking action, not ruling out criminal charges.

Strong said his trades were not disruptive to the funds involved, but within a month he had resigned as chairman and named investment banker Kenneth Wessels as the firm’s top executive. The following day, he brought in Goldman Sachs.

This isn’t the first time Strong has put his company up for sale.

In 1997, The Wall Street Journal reported negotiations for the sale of Strong Capital to Britain’s Prudential Corp. for $1 billion had broken down. A Strong spokeswoman said at the time the company chose to remain independent because it was in the best interests of clients and employees.

Industry observers had a different explanation for Strong’s change of heart.

“We all know every two, three or four years he’d flirt with selling, but we all concluded he was doing nothing but measuring his own personal value,” said Geoffrey H. Bobroff, a mutual fund industry consultant at Bobroff Consulting Inc. in East Greenwich, R.I.

Odds are greater that Strong will sell this time, given the unwanted attention he has attracted from regulators, the $4.5 billion in assets that have exited his funds in the past four months, and the risk that assets will continue leaving if he doesn’t sell.

Strong Capital executives have said they expect to make an announcement about the firm’s future — whether it’s a sale or some other option — this coming week or in early February.

But a sale won’t be sealed until Richard Strong signs on the dotted line.

Limited choices

“Would I be surprised if he regrouped or didn’t sell?” said George Reis, president of George V. Reis Investment Group in Two Rivers. “No. This is about more than money.”

Behind the personal quirks — his desire to have the blinds at a favorite restaurant set at a certain height and his guided tours for journalists of the boiler room to show how clean it is — Strong possessed a single-minded, unwavering desire to build a great company.

Can he walk away from that forever?

The key to answering that question is knowing how much Spitzer has on Strong — information that neither man is providing.

Regardless of the evidence against him, Strong may not have much choice, Bobroff said.

“I think he’s going to sell no matter what the nature of the violation,” he said. “I think the SEC and probably Spitzer want sufficient punishment for him that will more likely than not cost him his ability to own the business.”

Bobroff said the SEC is still unhappy about “letting him off the first time around.” The agency censured Strong in 1994 for making inappropriate trades involving junk bonds between his firm’s mutual funds and pension funds it managed.

That and a tough regulatory environment may be driving the SEC to take a hard-line approach on Strong, no matter what he did or didn’t do, Bobroff said.

Pressures ease

Still, Bobroff said, he doesn’t think the SEC would put someone out of business and, without jurisdiction in Wisconsin, Spitzer couldn’t do so if he wanted.

State regulators and prosecutors, meanwhile, haven’t been very visible.

“You haven’t seen Wisconsin try to come down on Strong, like Massachusetts and Colorado have done” to firms in their states, said Paul Herbert, a Morningstar Inc. mutual fund analyst in Chicago.

Massachusetts regulators pursued fraud cases against Putnam Investments and Prudential Securities, and Janus Capital Group agreed to repay $31.5 million gained from questionable mutual fund trading arrangements after investigations by Colorado and federal regulators.

Lately, financial pressure on the company has eased. True, Strong Capital’s assets under management have dropped to $38.1 billion as of Dec. 31 from about $43 billion before its troubles began in early September. But the flow of money out of the company is “starting to stabilize,” F. John Baranko, managing director of Strong Capital’s institutional business, said last week.

That wouldn’t be enough to convince Herbert that Richard Strong could pull off a return to the firm.

“In the end, you don’t have an attractive firm anyway,” Herbert said. “What have you got but less in assets? You’re still not competitive on fees. You’ve got younger portfolio managers than you had a few years ago. You don’t have advantages in terms of analysts that other bigger firms have. And the trust is not necessarily restored — which is the biggest thing.”

One sign that Strong is serious about selling his company is the manner in which he put it up it for sale. Strong had Goldman conduct a broad auction for his company, which is the least confidential way to sell a business.

“In this case, Dick (Strong) clearly thought it best that the market knew the company was for sale,” said John L. Beagle, managing director of mergers and acquisitions at Grace Matthews Inc., Milwaukee.

In a broad auction, the seller casts a wide net, allowing many potential buyers to submit preliminary bids. The seller narrows the field of bidders, usually to under 10, allows them to look at the company’s books, then asks for definitive bids.

Even so, Beagle said, a “substantial number” of broad auctions never result in a sale for a variety of reasons:

— The seller can’t get his minimum price.

— The company’s performance erodes just before or during the auction.

— The investment banker misreads the market.

Risk vs. reward

Just because Strong hired Goldman Sachs doesn’t mean he’s under any obligation to sell his company. But the price tag — The New York Times and Wall Street Journal reported bids ranging from $450 million to $750 million — could influence his decision. Strong owns 90% of the Menomonee Falls company.

“There’s an awful lot of value there,” Beagle said. “Even if the value erodes, you’re still talking about more money than you could spend in a lifetime.”

That, and pressure from regulators, have observers wondering how Strong could do anything but sell.

There aren’t many good reasons for Strong to keep his company “except because it fits his profile, and he won’t stop doing something just because someone wants him to,” Morningstar’s Herbert said.

Any agreement to sell Strong Capital would carry substantial risks for both sides.

Richard Strong is selling the business under fire sale conditions, and he could be facing penalties from regulators.

Potential buyers are likely worrying that investors could pull more money out of the company, cutting into its profitability. They would also be thinking about the risk that regulators could require future fee concessions, as they did with another fund company, Alliance Capital Management in New York.

In separate settlements with Spitzer and the SEC, Alliance paid a fine of $250 million and cut fees by 20% to settle charges of improper trades in one of its funds.

Potential buyers of Strong Capital could protect themselves by drafting a sales contract that didn’t pay much of the price up front and that is contingent on the amount of assets under management on certain future dates. They could also address potential regulatory risks contractually, Beagle said.

What can’t be addressed as easily is Richard Strong’s state of mind.

Which is more important to him: controlling the company he founded and nurtured since 1974 or the proceeds from a sale?

“In his heart of hearts, he’d love to wake up tomorrow and think this is all a bad dream,” Bobroff said. “But I don’t think it is.”

STRONG FINANCIAL CORP.

COMPANY’S CHOSEN OPTION: THE BROAD AUCTION

A broad auction is the most public of three standard ways to sell a company, according to John L. Beagle, managing director of mergers and acquisitions at Grace Matthews Inc., a Milwaukee investment banking boutique.

How a broad auction works

1: Bankers send out general information memorandum

2: Potential buyers submit preliminary bids with general terms

3: Bankers and seller select manageable group of buyers to do due diligence

4: Buyers submit definitive bids based on due diligence

BROAD AUCTION TARGETED AUCTION NEGOTIATED PROCESS

Potential buyers: wide range 5-15 2-5 Confidentiality: limited contained high Control in hands of: buyers seller seller Structure: formal two-stage managed accelerated auction by bankers direct negotiations Risk vs. reward: high risk, high reward medium risk, high reward low risk, medium reward

Source: Grace Matthews Inc., Milwaukee