Sale Reshaping Frank Russell -- Tacoma Firm Being Bought By Northwestern Mutual

One weekend four or five years ago, George Russell, chairman of the Frank Russell Co., used some crisis-management techniques to reshape his company.

As he walked out of company headquarters in downtown Tacoma on a Friday night, he dropped an assignment off with top management: Assume he and his wife, Jane, were killed in an accident that weekend. What would happen to the company, the world's biggest consultant to pension funds and other institutional investors? He wanted the answer on Monday.

On Monday, Russell got the sober answer. Under its family-ownership structure, the Russell company would not survive the death of its most prominent member. Estate and other taxes would kill it.

Shortly thereafter, Russell changed the ownership of the company, instituting an employee stock-ownership plan. Employees now own about 40 percent of the company, with Russell holding the remaining stake.

In a deal announced today, the Russell company will be reshaped again. It is being sold to Northwestern Mutual Life Insurance, likely for more than $1 billion.

Rumors of the deal circulated late last week, but Russell and Northwestern did not sign final documents until yesterday afternoon. Top officials from Milwaukee-based Northwestern, including President James Ericson, did not arrive in Tacoma until yesterday. The formal announcement was made this morning.

"We are happy to have found such a strategic fit," said Ericson. This is only the second acquisition made by Northwestern since buying regional investment bank Robert W. Baird & Co. in 1982.

Russell officials were equally optimistic about the deal.

"We like Northwestern's people, its values and its company culture - all very much like ours," George Russell said. "The combination of these two companies creates a new financial force in America, and even globally."

A definitive agreement was announced today. Formal closing of the transaction is expected in about six months. The deal is important for Russell on several fronts.

This is a high point for the company. While estate taxes and other family-company concerns have driven the desire to sell, Russell is selling when his company is in top condition. Russell is able to command a high price and had the negotiating room to ensure that the company stays in Tacoma with current management.

Over the years, Russell has built a worldwide reputation that grew from its consulting work with some of the largest companies and institutions around the globe. It estimates that it advises clients with assets totaling $1 trillion.

In recent years, it has taken that strong base in the institutional market and gradually spread into the retail market, using its unique "manager of managers" concept to move into money management and mutual funds for individual and small- to medium-size companies.

But going much further is an expensive proposition. The deal with Northwestern Mutual, the nation's fourth-largest mutual insurer

with assets of $71 billion, provides Russell with the financial clout it needs to move forward.

Russell has signed a number of strategic alliances over the past year as it has tried to broaden its reach. But it needed deep pockets to make its goals a reality.

Both companies are closely held. Neither would reveal any dollar figure for the purchase.

But companies such as Russell have been increasing in value rapidly over the past few years. A rival company, SEI Investments, is publicly traded. The market values it at about $1.3 billion, or more than four times SEI's 1997 revenue of $293 million.

Using a measure of four times revenue, the deal for Russell would be valued at about $1.2 billion.

George Russell decided several months ago to sell the company, mostly because estate and other taxes still would create a serious crisis for the company if something were to happen to him and his wife.

The investment-banking firm Goldman, Sachs & Co. was hired in April to help explore options, which included taking the company public. Once the company was put on the block, the list of possible suitors became large, ranging from eventual winner Northwestern to the Royal Bank of Canada and Societe Generale.

That's because the Russell company is a highly regarded organization in the rarefied world of pensions and investments. It is probably better known in Tokyo, London and New York than it is here in Washington state.

The company was founded 62 years ago by the grandfather of Chairman George Russell. It oversees about $42 billion in assets directly, and is adviser to the pension funds of AT&T, General Motors and Hitachi among its 1,500 customers in 25 countries.

The company also compiles stock indexes such as the Russell 2000, which has become a benchmark for small companies.

Russell had $305 million in revenue last year. The company has about 1,400 employees.

One of the key reasons for the deal with Northwestern is George Russell's desire to stay in Tacoma and keep his management team and employees together. The company will continue to be headquartered in Tacoma.

The fit with Northwestern is a good one; neither company is in the other's business. The deal also continues a recent trend in the financial-services industry of greater consolidation.

A key merger to watch in understanding the Russell deal is the agreement earlier this year between banking giant Citicorp and brokerage and insurer Travelers Group. The planned $76.4 billion Citicorp-Travelers merger would form the nation's largest financial-services company. It shows the clout of insurance companies and their desire to broaden their financial offerings.

Based in Milwaukee, Northwestern Mutual's slogan is "the quiet company," reflecting its conservative culture. That culture also was considered a good fit for Russell.

Stephen Dunphy's phone message number is 206-464-2365. His e-mail address is: sdunphy@seattletimes.com