TWO WALL STREET GIANTS BUYING INVESTMENT FIRMS.

Byline: Peter Truell The New York Times

The money management industry continued its rapid consolidation Monday as Morgan Stanley confirmed it would pay $745 million to acquire Van Kampen American Capital Inc., a mutual fund company, and Merrill Lynch & Co. agreed to pay $200 million to acquire Hotchkis & Wiley, an institutional money manager in Los Angeles.

A third deal may be in the works. CNBC, a business-news cable channel, and several news services reported Monday that Franklin Resources Inc., a mutual fund company based in San Mateo, Calif., was close to buying Mutual Series Inc., a mutual fund group, for more than $500 million.

Lisa Gallegos, a spokeswoman for Franklin, declined to comment on the reports.

Mutual Series, whose flagship fund is Mutual Shares, has $17 billion in assets. The group is managed by Michael Price, a well-known portfolio manager who also runs Heine Securities. An assistant at Price's office in Short Hills, N.J., declined to comment Monday.

Big Wall Street firms, like Morgan Stanley and Merrill Lynch, are aggressively building their money management businesses, believing them to be a good source of fee income. The acquisition of Van Kampen, which has $57 billion under management and is predominantly a retail business, also gives Morgan Stanley the equivalent of a big retail brokerage, a useful consumer for many of its financial products, and an entry into the retail business.

Clayton Dubilier & Rice, the investment firm that is selling its controlling 80 percent stake in Van Kampen to Morgan Stanley, stands to make a handsome profit from the transaction. Clayton invested a total of $272 million in Van Kampen, but is selling the company for an aggregate value of $1.175 billion.

That is because Morgan Stanley agreed to buy Van Kampen for $720 million in cash and $25 million of exchangeable preferred securities, and will assume about $430 million of Van Kampen's long-term debt.

But Morgan Stanley said in a statement that it had agreed that ``in no circumstances will the sum of the equity purchase price and the remaining long-term debt exceed $1.175 billion.'' The parties expect to complete the purchase by Nov. 30, the end of Morgan Stanley's fiscal year.

``I think it's a very good transaction,'' said Joan S. Solotar, a vice president at Donaldson, Lufkin & Jenrette, commenting on the Morgan Stanley purchase.

Morgan Stanley officials told securities analysts Monday that the prospective internal rate of return from the investment in Van Kampen is 18 percent to 20 percent, and therefore offers better prospective returns than those offered by Morgan Stanley's own stock, Solotar said. Morgan Stanley recently has used its resources to buy back its stock.

CAPTION(S):

Chart

Chart: A FUND DEAL

Assets under management at Van Kampen Am erican Capital Inc., in billions, as of March 31. The Morgan Stanley Groyp has agreed to buy the fund family for $745 million and assume $430 million in debt.

The New York Times