Wachovia Corp., based out of North Carolina, is better known for their Banking services than Asset Management services. They are currently the fourth largest bank holding company in the United States based on assets. However, Wachovia has been quietly moving in to the Financial Services sector and are now the third largest U.S. full-service Brokerage firm based on client assets. Their big move began in 2003 when Wachovia structured a joint venture with Prudential Financial, Inc. (PRU), in which Prudential transferred its retail brokerage unit to Wachovia but Pru kept a 38% ownership in the venture. In addition to the Prudential Retail force, Wachovia owns Evergreen Investments, a mutual fund company with $258 billion in assets under management.

According to sources close to the companies, a joint venture similar to the Prudential deal would be most likely, with Wachovia folding MFS into Evergreen. MFS currently manages ~$170 billion in assets, mostly in stock funds and Evergreen has stated they are looking to increase their Equities under management. At first blush one could argue they make a good fit. Both companies are also based in Boston and it is said that MFS management would want to retain an operational role, so logistically it would make the venture easier. Finally, Dennis H. Ferro, Evergreen's CEO, has said his goal is to have Evergreen become one of the top 10 U.S. asset managers, and merging with MFS would enlarge current assets by another 65%.

As no surprise to us, Wachovia is not the only rumored buyer, as MFS's name, though slightly tarnished, still has a lot of brand recognition. Mellon Financial Corp. (MEL) is also rumored to be looking at MFS. Mellon, based in Pennsylvania, has $5.3 trillion in assets under management and asset management is their predominant focus. As such they would likely be more "autocratic" over MFS which could be a problem if the management of MFS does in fact want to continue to be involved in operations.

When we ask ourselves what's in it for current MFS Fund owners, we are having trouble getting excited about a Wachovia - Evergreen deal. Evergreen, though bigger, doesn't have great mutual fund brand recognition and both companies have similar track records. Of Evergreens 308 mutual funds, according to Morningstar as of 9/30/06, 75 of those funds or 24.35%, were rated 4 Stars or higher (above average). At MFS Funds, out of their 655 funds, 106 or 24.42%, were rated 4 Stars or higher. We would prefer to see a buyer with an obviously stronger brand and money management track record, but it is not our decision. John McDonald, an analyst at Bank of America Securities, estimates that MFS could fetch in the $5 billion dollar range, a number that limits potential suitors. The saying on Wall Street is that Funds are not "Bought" but are rather "Sold", so any buyer will undoubtedly ramp up the advertising machine to make the purchase look more attractive. Stay tuned to see what happens.

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