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Filed by Franklin Resources, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
Commission File No. 1-9318
Subject Company: Fiduciary Trust Company International
FORWARD-LOOKING STATEMENTS:
Statements in this filing regarding Franklin Resources, Inc.'s business and
proposed acquisition of Fiduciary Trust Company International which are not
historical facts are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve a number of risks, uncertainties and other important factors
that could cause the actual results and outcomes to differ materially from any
future results or outcomes expressed or implied by such forward-looking
statements. Such risks, uncertainties and other important factors include: the
ability to obtain governmental approvals of the share exchange on the proposed
terms and schedule; the failure of Fiduciary Trust Company International's
shareholders to approve the share exchange; the risk that the businesses will
not be integrated successfully; the risk that the revenue synergies and cost
savings from the transaction may not be fully realized or may take longer to
realize than expected; disruption from the transaction making it more difficult
for each company to maintain relationships with clients or employees; increased
competition; the risks of new and changing regulation in the U.S. and
internationally; and other risk factors described in Franklin's recent filings
with the U.S. Securities and Exchange Commission.
ADDITIONAL INFORMATION:
It is expected that Franklin Resources will file a registration statement and
other relevant documents concerning the proposed acquisition of Fiduciary Trust
Company International with the U.S. Securities and Exchange Commission and will
mail a prospectus to shareholders of Fiduciary Trust Company International.
FIDUCIARY TRUST COMPANY INTERNATIONAL SHAREHOLDERS ARE URGED TO READ THE
PROSPECTUS AND THE REGISTRATION STATEMENT WHEN THEY BECOME AVAILABLE AND ANY
OTHER RELEVANT DOCUMENTS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION
BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION REGARDING THE PROPOSED
TRANSACTION. Investors will be able to obtain these documents free of charge at
the Commission's web site at www.sec.gov or from Franklin by directing such
requests to Investor Relations, Franklin Resources, Inc., 777 Mariners Island
Blvd., San Mateo, CA 94409, (tel: 1-800-632-2350 x28900).
NY2:\976715\03
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On October 25, 2000, Franklin Resources, Inc. and Fiduciary Trust Company
International held a meeting for the investment community discuss the
acquisition by Franklin Resources, In. of and Fiduciary Trust Company
International. A transcript of the meeting and simultaneous webcast follows.
October 25, 2000
11:00 a.m.
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MR. JOHNSON: Good morning
everyone. I'm Charlie Johnson, Chairman
and CEO of Franklin Resources, and I'd
like to introduce the folks at the head
table.
On my immediate right is Anne
Tatlock, who is President and CEO of
Fiduciary Trust Company. On her right is
Michael Magdol, who is Vice Chairman of
Fiduciary Trust Company, and on my left is
Martin Flanagan who is President of
Franklin Templeton Companies.
First, I would like you all to
look at our forward-looking statement here
so that we comply with all of the legal
requirements.
MS. TATLOCK: Is there a test?
(Laughter.)
MR. JOHNSON: I assume all of
you speed readers have had a chance to
look at that by now, so....
I would like to welcome you
all. This is an extremely exciting day
for us. As you know, this morning we
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reported our earnings, and, more
importantly, we reported the merger
with -- of Franklin Resources with
Fiduciary Trust Company. We're all
extremely excited about the opportunity of
putting these two money managers
together. It's a very strategic and
complementary merger with very little
overlap in either our markets or our
investment styles.
The transaction is tax-free, and
it will be done as a pooling of interests
and an all-stock transaction. The
purchase price will be approximately
113.38 per share or $825 million, there's
a collar, with the exchange being plus or
minus ten percent, depending upon the
average ratio or the average price of the
Franklin Resources stock twenty days prior
to regulatory approval.
The expected closing is the
first quarter of calendar 2001, and
Fiduciary will be run as a wholly owned
subsidiary separately; the management will
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stay in place, their style will stay in
place. We have employment contracts or
will have by signing employment contracts
with all of the senior people. There's --
in order to provide retention, we have an
85 million dollar cash and stock option
retention pool for all employees of
Fiduciary, and the inside directors have
agreed to vote their shares in favor of
the transaction.
Strategically, it makes an awful
lot of sense. There's very little
overlap. Franklin as you know has been
primarily a retail or in the retail market
with mutual funds; Fiduciary has primarily
been in institutional and high net worth
clients. Combined assets under management
will be $280 billion across all assets and
style, from domestic to international,
from value to growth. And I might add
that we are delighted with the Fiduciary
growth capabilities. They've had really
an outstanding record in that, that area.
Franklin, of course, is the largest
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municipal fund, mutual fund manager, with
over 44 billion, and Fiduciary brings to
the table a strong institutional global
fixed income position.
The high net worth business is
probably the fastest growing business in
financial services, and we are very
pleased to have Fiduciary. They are a
leader in this area and have been growing
that business extremely nicely.
The combination doubles our
institutional assets, and together we will
have over 1,000 institutional accounts and
1,000 family relationships across many
markets.
Franklin, we expect, will offer
retail products that are generated and
managed by Fiduciary, and we feel that the
global reach of our organization will
leverage both of our growth. After the
merger, we will have offices in 29
countries.
MS. TATLOCK: I'm sure all of
you in this room know Franklin far better
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than Fiduciary Trust, but I hope you all
leave with a much clearer understanding of
Fiduciary.
We believe we are a very unique
franchise. We have been in existence for close to
70 years, actually managing money for
high net worth families from 1931 and
subsequently managing money for
institutions both not-for-profit and
for-profit institutions as we emerge
through the period of wealth in those
institutions in the Forties, Fifties,
Sixties, Seventies, Eighties and Nineties.
This is important because our focus
throughout our entire history as a pure
asset management firm.
We are delighted that we are
actually combining with a management that
has had the same sense of importance and
priorities with respect to the business
strategy of their organization in
emphasizing asset management for
individuals and institutions.
We have an excellent long-term
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investment and financial performance
record. We have performed very well for
both our clients and our shareholders
throughout our entire history. I think
that's evidenced by our reporting to our
shareholders with respect to earnings and
all the financial ratios which my
colleague, Michael Magdol will speak to
when he talks.
With respect it our clients,
perhaps our performance is best evidenced
by the very high retention rate that we
have with our clients. It's remarkable,
we feel, that our retention rate is over
99 percent. It's less than 1 percent of
our clients in the high net worth area
that have left us for one reason or
another.
We have a global presence with
which we have attached a tremendous
importance. We as an organization made
the decision that we really wanted to
focus on the global markets in the
mid-Sixties, which was when it wasn't
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really that profitable for an organization
to undertake such an effort, but a
position does to do the research and the
kind of work in the financial markets,
both equity and fixed income, that today
makes us a very strong competitor.
Our clients include some 500
institutions and more than a thousand
families. Most of them are in the United
States, these high net worth families, but
many of them are outside the United
States, and I think working with Charlie
and working with Franklin, we're really
going to be positioned to expand that in a
very meaningful way.
We have really done our work
quite differently and very -- and that's
why this combination is so complementary.
We've always focussed on growth-oriented
management with respect to our investment
process, and we also have always focused
on separately managed accounts, and this
brings a dimension, I believe, to Franklin
which will help Franklin, and we will be
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helped by their capabilities and their
focus and research.
We have focused with respect to
really expanding the total services that
you need to effectively manage wealthy
families, and the transfer of wealth that
occurs in the generations of -- throughout
the lives of these people. Therefore, we
do not only investment management work but
a lot of estate planning, asset
allocation, tax planning, custody and
administration, as well as some private
banking.
If you turn to the -- if you
cast your eye at the next slide, we have
categorized here the key client segments
that Franklin, Fiduciary Trust, and then
the combined organization will have a
presence. As you can see, there is not
overlap of any significance as -- up until
the time that we were -- as we stood as
independent units. You can see that as a
combined organization we are positioned to
effectively get business in all of these
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areas, be they the mutual funds, the high
net worth area, the institutional market,
both the DC and the DB markets, the
endowment and the foundation markets.
On the next slide, I think many
of you in this room are probably quite
familiar with the issue that's addressed.
There is tremendous opportunity throughout
the world if you are a firm positioned to
manage institutional money that's going to
be -- actually and retail money that's in
the market because of the whole
off-loading of the liabilities associated
with retiring from the private sector to
the public sector. I think probably
everyone in the room has read a great deal
about what's happening in Europe and in
Asia and in Latin America.
And if you cast your eye here,
you can see that the largest markets here,
Japan, the U.K., Canada and Germany, all
markets within which both Franklin and
Fiduciary have done work are growing
very, very rapidly. Today Japan alone
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represents about $2.5 trillion in this
area of the market. And then if you look
at the three to five compounded annual
growth rate that's expected both on a
retail and institutional business, those
numbers are double digit. Our market is
no longer growing at double-digit rates.
So this really is a very important
strategic business issue to be remembered.
MR. JOHNSON: And I might add
that we have offices and clients in all of
the countries that you, you see and we are
very excited about the opportunities for
growth in those countries.
MS. TATLOCK: And we do not have
that overlap because we couldn't afford
the offices, and we're so excited about
the fact that we can get in there and work
together to really develop it.
MR. JOHNSON: As you can see, we
have a strong international presence with
offices in 29 countries and 45 offices
worldwide, and this --
MS. TATLOCK: And the --
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MR. JOHNSON: Go ahead.
MS. TATLOCK: No; go ahead.
The uniqueness of this is that
these -- this presence isn't limited to
the typical map that you might see a money
manager talking about. It's not just the
developed markets; you have a lot of the
developing markets here. So the
presence is not only marketing and
investment management, but it's sourcing
the intellectual work that's used in the
Templeton Funds, for instance, and
throughout Franklin in general.
MR. JOHNSON: This shows the
retail defined benefit and defined
contribution exposure that each of the
organizations have in the U.S. as well as
the important overseas countries, and on a
combined basis, as you can see, we have a
retail and defined benefit exposure in
every one of these countries, and on the
defined contribution we are in all the
major countries, the -- some of them have
not yet -- that market has not yet
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developed and we have -- we are positioned
to be there when that market does develop.
MS. TATLOCK: The equity
capabilities really now cut across all of
the key mandates that any planned sponsor
would really want you to address, or any
wealthy family.
In today's environment, you
don't differentiate between planned
sponsors and individual wealth to the
degree that you used to because high net
worth families are very, very
sophisticated in many cases, and so to
have the capability to really provide
value, growth, core, international,
European, Asian, emerging markets, sector
funds, specialty funds or alternative
investments is really a requirement, if
you are going to be a leader, and we're
positioned to be in that position.
MR. JOHNSON: As we said
before, Franklin is the number one
provider in tax-free muni funds and also
has broad fixed income strengths, and on a
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long-term basis we have had superior
risk-adjusted returns in our muni area and
our fixed income. In fact, the vast
majority of our muni funds are ranked four
or five stars by Morningstar. As a value
manager, some of our funds stumbled during
the '98 market and part of the '99, but
I'm happy to say that the performance over
the past year and -- as well as during '99
on the whole was extremely strong, and the
mutual series, for example, funds were in
the top quartertile and several of them
were in the top decile on a year-to-date
basis.
MS. TATLOCK: And with respect
to the fixed income capability of
Fiduciary, we are a leading provider of
global, international, core, U.S. core,
opportunistic fixed income portfolios for
institutions and high net worth clients
worldwide, remembering that all of these
accounts are managed on a separate basis,
and today we manage some $22 billion of
such mandates.
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Speaking to the opportunity in
the high net worth area, Fiduciary, we
believe, will bring the franchise that has
been developed over 70 years to an area
where there's really tremendous growth.
If you look at the growth in the
high net worth assets in the market in
general, in 1999, it totaled some 25-1/2
trillion dollars. Within five years, or
by 2004, this market should approximate
close to $45 trillion. This means
tremendous opportunity, and if you try
to -- hopefully, the fees won't be too
low, but if you try to look at the revenue
opportunity on a realistic fee basis, you
could see fee revenue attached to this
that's very symmetric, in billions rather
than in trillions, of course.
So the opportunity that
Fiduciary provides is really the solutions
opportunity, the solutions orientation
that we bring to the management of high
net worth money. We have professionals
who have been dedicated, trained,
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experienced and have been providing
tax-aware transference of wealth over
generations for many years at our
organization. You cannot build a trust
franchise in a short period of time.
Strong relationships with key
family intermediaries, lawyers,
accountants, financial advisors and such
have been critical to the underpinning and
the growth of this part of the market.
And Fiduciary's private client
relationships have been important also to
gaining access to the institutional market
because wealthy individuals are often
prominent and successful people in their
own right and lead into other
opportunities.
MR. JOHNSON: We are
particularly excited about the
international possibilities in the high
net worth market. We think that with our
offices overseas, we should be in a
position to really capitalize and leverage
that into some very fast growth.
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In addition, we are, of course,
headquartered in California, and Fiduciary
is headquartered in New York, and we feel
that we can leverage that in the high net
worth market as well.
MS. TATLOCK: And our average
size account today is $12 million for the
high net worth clients, and that continues
to build and grow with some speed.
To get a sense of our
institutional business, perhaps it's best
captured in our next slide, which cuts
across the five regions of the world, the
U.S. through Asia, and looks at the types
of clients, and I can speak to the breadth
of the mandates in each of these
categories.
In the U.S., for instance, our
client list cuts across public funds of
major nature, such as the CALSTERS, the
California State Teachers Employment
Retirement Systems, which we have had for
close to a decade, the Metropolitan Museum
of Art, Princeton, which has been a
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significant client for the firm for many
years, and a custody client.
In Canada, I might mention
Bombardier, for which this client actually
hires us for their pension funds in
Canada, Europe and the U.S.
In Europe, there's a presence
with the Canton of Vaud, for instance,
which is a public sector fund in
Switzerland; in Switzerland we are the
largest non-Swiss manager of pension funds
in that country.
And in Australia, we have a very
unique mandate with Australia Post as a
manager for global real estate, real
estate investments.
And in Asia, I think anyone
that's been to Asia knows the Hong Kong
Jockey Club, and we manage their money.
The strength in the
institutional assets, if you look at the
combined companies assets, it really
creates a pretty compelling mix of
institutional mandates that cut across
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defined benefit and DC plans. And
Franklin's infrastructure combined with
the work that we have been doing on a
separate account basis is really critical
to us being able to be there, for
instance, for the MPF Fund in China, to be
there in Japan. And so, we are really
just bursting to go on that. I think
that ends my part.
And Michael?
MR. MAGDOL: Yes, thank you.
Just to flush out our
financials, Fiduciary Trust Company is a
New York State.-chartered bank, a commercial bank,
but has elected to use its powers to
provide trust and custody services to its
clients since its inception.
Just to give you a sense of our
balance sheet, it's about $650 million, of
which over 60 percent represents short-term
investable assets, only about $150 million
of our balance sheet are loans to our
clients. Those are traditionally high net
worth clients, and I guess in the history
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of the firm, we have never really
experienced a loan loss because all the
assets are under our custodial control.
On the general characteristics
of the company, as you can see, our cash
flow over the past few years has generated
a good growth pattern, going about a
compounded rate of about 19.3 percent.
Our revenues, which comprise 95 percent of
fee income and only 5 percent of net
interest margin differential income,
because we don't use the balance sheet for
commercial banking purposes, has grown at
a compounded rate of about 12 percent, and
our earnings per share have had a very
steady, stable growth pattern well over
the years. In the past 20 years plus we
have always had a consistent annual to
18-month growth in our dividend pay-out,
and we have had a compounded growth rate
in the recent past of about 15 percent,
representing a return on our equity of
approximately 22 to 23 percent. Thank
you.
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MR. FLANAGAN: Thanks, Michael.
And if we take a look now at the
pro forma financial profile of the
combined organizations, I think it will be
striking to everybody in the room that the
result is, it is the strongest financial
profile of any investment, independent
investment management organization in the
industry. So that's the start, and that's
pretty good.
And if you start to look at some
of the components of that, EBITDA for
this, you have a nine-month -- excuse me,
12-month period ending September 30th
would have been in excess of $900 million.
The point of that is that it gives us the
ability to fund any further development
and expansion that Charlie and Anne have
been talking about, putting us in a very
unique position.
The other important element to
take a look at is the strong equity base,
and this, again, gives us a unique
position in the industry where we will be
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able to take a long-term view during any
volatile period but also, equally
important, to be able to act very, very
quickly to any further opportunities that,
you know, might arise to further enhance
the organization.
The combined organization will
manage $280 billion. The increased size
is important, but another very, very
important point is the diversification
enhancements that come along with that.
The company is now even further
diversified on a product basis, on an
investment objective basis and also by the
geographic location of the clients that we
have around the world.
If you take a look at the
operating leverage, it's quite immense,
and this is always important commentary
for people when in the beginning of a
transaction, and what we did as a combined
management team over the last two weeks is
do a best job we could of a detailed
analysis to identify some near-term
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synergies, and that's, you know, things
that we would hope to accomplish or will
accomplish within the first two years.
And in the area of technology, a
principal focus is for us to leverage the
e-business platform that we have already
created, and the Franklin Templeton
organization. And I think a number of
you, if you took a look at the earnings
press release, you can see some of the
results in our e-business recognitions
just this past year.
If you take a look at some of
the leverage on the operating expense
side, what that's really relating to is
the combined purchasing power of the
organization, and we have looked at the
different types of services that we both
provide, and we have identified areas
where in fact we know we will be able to
get some cost savings out of that.
So we expect to fully achieve
these synergies within the -- by the end
of the first two years. That would make
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the transaction moderately accretive at
the end of the second year, excluding the
impact of the retention pool. And once
again, as Charlie and Anne pointed out,
there are substantial revenue
opportunities, but to be very clear, they
are not included in these financial
estimates that we have just speaking about.
The important part of the
combination is that it really expands the
depth and breadth of the organization.
And this is a growth story. It's not a
story about cost savings and cost
synergies, but the point we want to make
is that the transaction still makes sense
simply by looking at cost synergies alone.
MR. JOHNSON: Fiduciary will be
run as a separate subsidiary of Franklin
and retain its brand, and it's
headquarters will remain in New York. The
current Fiduciary board and its management
will remain intact. Franklin will add two
representatives to the Fiduciary board.
Anne Tatlock will continue as CEO of
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Fiduciary, and she will join Franklin's
board and Office of the Chairman; and I
must say, that we are all extremely
impressed with Anne's talents and look
forward to working with her very much.
We are organizing a joint
integration committee, which will include
senior managements -- or senior members
from both managements.
We are really excited about this
transaction because we feel it will
accelerate our growth. It balances the
business mix, basically covering all
markets. It deepens the scale of our
investment styles, and it covers all of
the important regions in the world.
Combined assets will be over
280 billion across all asset classes and
all investment style spectrums, positions
the company to take advantage of the
strong growth in the high net worth
business, and it doubles our institutional
assets and adds a thousand family
relationships to the organization. I
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think it will leverage and enhance the
global reach of both companies, and we are
extremely excited about that.
As far as the earnings are
concerned, which we haven't spent a lot of
time on but we will take questions on, you
will notice that our earnings release was
much more extensive this quarter than it
ever has been before, and that's as a
result of input from all of you who have
requested more information, and I think
that we've given you everything that
you've requested. But if anyone has some
suggestions on further disclosures for our
next quarter, we would be certainly happy
to entertain them.
At this point, I would like to
open the meeting for questions and
answers. We have a number of people on
the telephone, because there was
originally scheduled an earnings telephone
conference call at 4:30, so we'll start
out and I'll take three calls or three
questions from the audience here and then
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we will take three questions from the
telephone and continue.
Yes, sir.
MR. HANBUREY: Couple of
questions. One for the Fiduciary people.
Could you run through the balance sheet
numbers again?
MR. MAGDOL: Certainly, I would
be pleased to. I can make a copy of the
balance sheet available to you. We do
have an annual published account, and our
call report is filed quarterly with the
New York State Banking Department. But
just to give you -- and which is publicly
available information. But just to give
you, in rounding terms, our total balance
is sheet is $650 million. We have about
$150 million in loans outstanding, all of
which are fully collateralized by assets
under our control. They are all U.S.
dollar loans and all short-term floating
rate obligations. To the extent that we
have any fixed-rate loans, which are very
modest, they're fully neutralized from a
swap point of view.
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We have $380 million of liquid
assets representing Fed funds sold, short-
and medium-term U.S. governments, and some
small portfolio of tax exempt bonds. And
the balance represents fixed assets,
receivables and accruals.
MR. HANBURY: The cash coming
from Fiduciary to Franklin will be how
much?
MR. MAGDOL: Cash coming --
MR. HANBUREY: Net cash?
MR. MAGDOL: Our capital is
$95 million, so of that $95 million, it
funds approximately $100 million in fixed
assets, receivables and accruals. So in
terms of cash between the business,
it's -- there's very, very little, if any.
MR. HANBUREY: And the a
question to Charlie about just the
immediate -- how long will the golden
handcuffs be in -- how long will you take
to amortize the $85 million of retention
bonuses for the Fiduciary people, and do
you expect this transaction to be neutral,
accretive or dilutive over the next year
or so?
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MR. JOHNSON: That's a number of
questions in one, but I think Marty and I
can answer both of those.
The contracts with the Fiduciary
folks will be three to five years, and
depending upon the individual.
I think I'll ask Marty to
comment on the 85 million dollar retention
pool as well as the dilution.
MR. FLANAGAN: The 85 million
dollar pool will be over four years, but
don't amortize that there's, you know,
straight over the four years; it's more
heavy in the first two years and less so
in the last two. But that will be, you
know, fully disclosed as we finalize that.
And then on the whether it's
accretive or dilutive, I think the first
thing I'd like to come back to is that,
you know, we're starting out of the box
with identified cost savings for the
organization, and as we had taken a look
at whether it's accretive or not, if you
take sort of a static view of the world
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right now, and you go out with sort of
I/B/E/S growth numbers, you know, we think
that they will be modestly accretive by
the end of the second year.
MR. JOHNSON: And I think in the
first 12 months, assuming a static
position, which we don't expect things to
be static, it would be 4 percent dilutive;
I think in the second year, second
12 months, it would be 2 percent dilutive;
and in the third -- after that it would be
accretive.
MS. BUTTE: Amy Butte from Bear
Stearns. Two questions.
First, I was wondering if you
could go through the decision-making
process to use stock rather than cash,
especially considering the large level of
equity or excess capital that Franklin is
currently holding?
And second, I'm wondering in
terms of the cost saves that you've
identified, what percentage can we expect
that to happen in, let's say, the first
six months versus kind of down the road
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towards the last part of the two-year
period?
MR. JOHNSON: The stock versus
cash was just a negotiation, and we wanted
it to be a tax-free deal.
MR. FLANAGAN: On the timing of
the cost saves, I think, first of all, you
know, we expect the transaction to
close, excuse me, by the end of the first
quarter next year, calendar quarter, that
is, and what we're going to do, as Charlie
had mentioned, is start out of the box
with an integration team and, you know, be
pretty aggressive in trying to ensure
we're going the right things for the
organization, you know, very quickly. The
timing of those cost saves, frankly, we
have not scheduled them out right now. But
I will say that we feel confident that by
the end of the second year, we will get
all of those in place and we'll have a
better idea of the timing of them as the
integration team does a little bit more
work.
MR. JOHNSON: Let me take a
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couple of calls from the telephone at this
point and we'll come back to the floor.
Is there a call ready or a
question ready on the telephone?
SPEAKER: Yes. One moment,
please. Once again, ladies and gentlemen,
please press the 1 on your touch-tone
phone if you do have a question.
Mark Constat of Lehman Brothers,
please state your question.
MR. CONSTAT: Good morning.
First question, actually along the lines
of what Amy was asking, could you discuss
how you negotiated sort of a fair price
here, whether your criterion were return
on investment oriented, EPS, accretion,
dilution oriented, or whether pricing was
really more a function of where Fiduciary
Trust's peers had traded similarly,
etcetera. And then, again, how you
weighed that against the opportunity cost
of being able to revert to shares with the
excess capital.
MR. JOHNSON: Well, we feel that
Fiduciary is a tremendous opportunity and
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a tremendous franchise, and we negotiated
and came up with a fair price that we
thought benefited all the parties. And in
negotiation you always have two sides and
this is the final result.
Anne, is there anything that you
want to add to that?
MS. TATLOCK: I believe that the
price is fair and represents the franchise
value for our shareholders. I also feel
that it is -- it was important, there was
a question with respect to why it was
stock and not cash, I think that I really
want everybody that owns Fiduciary stock
to own Franklin stock. They are going to
be the members of my staff that's going to
be working with me, and I really feel that
many of our clients own Fiduciary stock
and I'd like them to own Franklin stock
and not be faced with the decision;
they're getting cash, they're going to
have to pay taxes, and then perhaps not
have as much. Really aligned with my
interests now.
My interest is now Charlie's
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interest and Marty's and Michael's, and I
just think it makes more sense.
MR. CONSTAT: Very glad to hear
you say that.
Actually, if I could also just
turn to the earnings for just a second as
well, maybe to you, Marty, first of all,
very much appreciate the additional
printed disclosure on sales redemptions,
flows, and the business highlights in the
press release. But I was wondering if
there's any color you can add to the
either sequential increases in the always
ambiguous Other category on the expense
side as well as what appear to be a
sharper increase in Other Income even than
the gain on sale of the headquarters when
it's adjusted.
And then lastly, if there's
anything material in the shift of asset
flow mix, any particularly high or low fee
assets that might have distorted in-flows
or out-flows at all this quarter.
MR. FLANAGAN: O.K. Hopefully I
can remember all your questions, Mark, but
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let me try to --
MR. CONSTAT: Other income,
other expenses, and anything funny in the
flows.
MR. FLANAGAN: Gotcha. O.K.
Other income, yeah, there were
some capital gains outside of the
building, but that's, as you know, that's
sort of normal course for us; as they
arise, they arise. It's nothing that --
we make good investment decisions as
opposed to, you know, anything else.
MR. CONSTAT: O.K.
MR. FLANAGAN: Other income, it
was an active order for us in, you know,
various travel and those types of things
and conferences, and that's some of the
explanation for the other expense area,
and I think if you look at the quarters
prior to last, you get a better idea of
what's really comparable. IS&T and
occupancy cost it's an area that we've
been talking about for sometime. I think
the best way to describe it, we have had
many, many projects underway to become a
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leader in using technology to solve
business problems. I think the best
result of that is explained in the press
release and by some of the recognitions we
have gotten, by Casina is one of the top
sites and Dalbar, and you're also getting
fantastic feedback from our advisor
channel on our proof services, and I think
everyone has seen the cost improvements
from the operational areas over the past
12, 18, 24 months. So that is what is
behind there.
The other thing we have talked
about in the past is that with some of the
accounting changes, it does make that line
a little bit more volatile with the
capitalization rules and what is and what
is not being able to be capitalized.
We also are going through a
number of changes on the real estate side.
As you know, we are building our complex
in San Mateo, which gave rise to the sale
of that product -- excuse me -- the sale
of that building, and so we will be in
this transition phase of moving people
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around quite a bit between now and next
July. And that is, to a large degree,
what has gone on there.
MR. CONSTAT: O.K.
MR. FLANAGAN: On the flow side,
if, once again, I think if you take a look at the
U.S. retail fund flows, there was a higher
level of sales in the Class A area; that
also had a -- resulted in a higher payout
ratio in the quarter than previously. So
those are some of the highlights of the
explanations during the periods.
MR. CONSTAT: O.K. Thank you
very much.
MR. JOHNSON: Thanks. I think
we had a question from the floor.
MS. SOLATAR: Joan Solatar,
CSFB. A couple of questions.
I guess, one, if you can
articulate a bit how you will leverage one
firm off of the other more specifically.
For example, internationally, what sort of
distribution to you need to add? Same
thing domestically, what resources would
Fiduciary need to add to, you know, expand
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into other markets even domestically?
MR. JOHNSON: Well, I think, for
example, with Fiduciary's growth record,
we could organize a fund that would be
sold through the retail channels.
Internationally, we have C cap funds that
are headquartered in Luxembourg, and those
are sold in many nations throughout the
world. We could add a C cap fund which
would be managed by Fiduciary. So those
are just two examples, and there are many
more.
We have offices where,
traditionally what we have done is set up
offices in countries where we are
investing to get on-the-ground research,
and then we have added a sales capability
in those offices where the market appeared
to be promising, and I think that all of
those offices can be leveraged to include
Fiduciary.
MS. SOLATAR: And then a couple
of financial questions actually.
What sort of asset growth are
you assuming for Fiduciary to get to your
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accretion in the third year? And then
going back to the ROI question, you know,
it is at the high end of prices paid over
the last three years on a multiple basis,
so what sort of return do you require on
your acquisitions?
MR. JOHNSON: Well, just from
answering the last part first, and then
I'll ask Marty to answer the other, I
think if you look at the Schwab
transaction and other transactions that
are similar organizations, that this is
priced very favorably in comparison.
MR. FLANAGAN: Yes. On the
forecast question, I think the best way
that I think we're going to address it is
not to get into the business of
forecasting but I can give you some idea
of what makes sense. And, you know, there
are many, many third parties that are
publishing sort of the relative growth
rates of these types of businesses, and we
fully expect to be tracking those, and we
think it's a great franchise.
And, you know, coming back to
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the question that you asked earlier of how
we are going to leverage the
organizations, you absolutely cannot
overestimate the importance of the global
infrastructure. Templeton started maybe
six, we got somewhere, Franklin came
along, enhanced it again with, you know,
once again, a stronger balance and
capabilities. You pull together Fiduciary
and Franklin Templeton and it gets pretty
exciting, so....
MS. TATLOCK: I just might add,
a good example of this, without an
integration committee having been formed
to identify all of this, we do not have a
presence in Singapore. We have the
product capability to manage separately
managed accounts, for instance, for the
monetary authority and the leading
institutions there. To operate in
Singapore, you have to have an office. For
us to open an office in Singapore would be
very costly with our presence in Hong Kong
and Japan.
As of today, I can get a RFP, if
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one's going out, and have our marketing
department work on it instantly. It
leapfrogs regulations, it leapfrogs
infrastructure. It really positions an
organization to look in ways they could
never afford to look.
Now, we still will have to
eliminate things we'd want to do, because
we won't have -- together we still won't
have, you know, all the money. We'll have
to make decisions, but it just makes that
decision-making and that business
opportunity so much richer and deeper.
MR. JOHNSON: Let me take
another call from the phone lines. Is
there another question on the line?
SPEAKER: Yes, sir. Richard
Strauss of Goldman Sachs, please state
your question.
MR. STRAUSS: Yes, Charlie, I
guess kind of follow-up to the strategic
rationale here, in terms of the high net
worth business, you know, how much -- one,
how much decision was it, you know, you
looked at their global platform, what is
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the global mix in terms of high net worth,
and specifically what can you do there?
Also, I mean, you definitely have a track
record of laissez faire, of leaving the
acquisition alone.
Is there also here though an
opportunity to really enhance the growth
of the high net worth business by applying
your marketing muscle?
MR. JOHNSON: Well, I think just
the perfect example, to follow up Anne's
comments is Singapore. The high net worth
business is booming in Singapore, and we
have not been in that market at this
point. And Singapore is sort of the
headquarters for Indonesia and Malaysia and
other places where there are a awful lot
of wealthy people, and we certainly hope
to move in that market. But that's just
one example. There are a number of them.
MS. TATLOCK: We can come to San
Mateo and get clients.
(Laughter.)
MR. STRAUSS: Also, Charlie,
just on the -- actually, Marty, this can
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be for you too, as well. Just in terms of
the cost savings, it seems like kind of an
aggressive number, and I'm just wondering,
will there be a way for us to benchmark
and kind of monitor the progress in terms
of your deliverance of these cost
savings?
MR. FLANAGAN: Richard, I think
where we are going to end up on that is we
are not going to end up getting in the
business of publishing sort of our score
sheet internally of cost savings. But I
think where it's going to be reflective is
really in the operating performance of the
company, and I think, truly, we have a
record over the past few years, in
particular, of being very effective in
managing costs and getting synergies.
And to your point, I want to
come back to the notion of laissez faire,
I think it's a little different than
that. I think the approach that Charlie
has laid out that has been successful has
been one of nurturing and supporting the
organization that has come into the fold
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and while at the same time taking
advantage of the best practices between
the two organizations. So that's the
model that Charlie has put in place that I
think has been effective, and if you look
at what has happened, you know, going back
to the original Templeton-Franklin
combination, I think that's what should be
in people's mind as opposed to laissez
faire.
MR. STRAUSS: O.K. And just one
more follow-up here, just the operating
margin and the earnings, it slipped year
over year a couple of percentage points,
one was the other expense, which you
addressed, and all the comp costs were
up. And, you know, is this kind of like
just an anomaly in a more challenging
environment or is this -- does this really
speak to the trends, where it's just --
you know, it's getting more difficult to
be flexible even in environments that get
tougher?
MR. FLANAGAN: You know, with
regard -- with regarding the compensation,
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if you look at the number of employees we
have now it's about 6500 employees. So
it's quite different from where we were
from two years ago, but the type of
individual has changed. It's a much more
high powered individual, and -- which is
good for the firm and good for our
clients, but no different than you and
Goldman Sachs and the rest of the people;
it's a very, very inflationary period
right now in financial services to attract
and retain good people and we are
committed to doing that. With good people
good things happen and the business will
take care of itself after that.
MR. STRAUSS: O.K., thanks.
MR. JOHNSON: We are getting
fairly late. I will just take one more
question from the floor.
Is there a mike back there?
MR. KATZ: Bill Katz from
Merrill, two questions -- two-part
question, I should say.
First question, could you talk a
little more about how you plan to leverage
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the institutional side of the business?
And maybe secondarily, could you break
down the profitability of Fiduciary a
little bit more detail, maybe the high net
worth versus the institutional, maybe put
into context where the cost saves will
come from, from that perspective?
Thank you.
MS. TATLOCK: Well, I'll take
the last part first, because maybe I
misunderstood it. But I'm not looking for
cost saving with respect to the high net
worth area. It's an area in which we'd
want to continue to build, to grow
revenues and to grow clients.
With respect to the discussions
that we've had on the institutional side,
what we would envision is the name that
Franklin has in markets around the world,
the Franklin Templeton name, is so much
better known than the Fiduciary name that,
together with the presence in these
various markets and the experience that we
have in the institutional market, we will
be able to generate a lot of very good
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institutional client business that
otherwise wouldn't be there for us
independently or wouldn't be there for
Franklin independently because they have
the presence and the infrastructure and
the quality name; we have the capability,
but it has to be brought together.
And this is very important in
the defined benefit and mostly the defined
contribution area of the market, the
institutional market. Not to disregard
the not-for-profit market, but it's not as
significant outside the United States,
because the tax laws outside the U.S. do
not encourage people to give to tax-free
institutions where the governments provide
for running the not-for-profit institutions.
MR. JOHNSON: I think there was
one more question back here.
MR. McVEIGH: Follow ups, the
high net worth business is 28 percent of
your assets under management. What
percentage of your revenues are pretax
profits? That's the first question.
MR. MAGDOL: The revenues from
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our high net worth business, ex our net
interest margin income, approximate about
40 percent.
MR. McVEIGH: Of overall
revenues?
MR. MAGDOL: Of the overall
revenues.
MR. McVEIGH: The second
question, you talked about diversification
of the product. You have $28 billion in
equities, how much is growth, how much is
value?
MS. TATLOCK: None is value. All
is growth or core.
MR. McVEIGH: O.K. And when you
say -- can you explain exactly what "core"
is?
MS. TATLOCK: Core is where your
benchmark would be the S&P 500. Typically,
in equities, and we also have core growth
and fixed income. We actually have no
value product per se. Our entire
investment process, with stock selection
and research, is all growth or growth
oriented. So there is no overlap.
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I will never walk into an office
and compete for a new client and find that
Templeton's the competitor; we can both
win assignments from the same client.
MR. McVEIGH: O.K. Just one
other follow-up.
On your institutional business,
you didn't include what the ending assets
were in 1999. Can you give us that and
also what the net flows were year-to-date
2000?
MS. TATLOCK: I'm trying to
remember what the net assets were at the
end of 1999. I would hazard a guess they
were about 43 billion, buy don't hold me
to that. I could get back to you on that.
MR. McVEIGH: O.K. Just the 825
includes the retention or doesn't include
the retention?
MR. FLANAGAN: It doesn't
exclude the retention.
MS. TATLOCK: No.
MR. McVEIGH: So it's 825 plus
the 85 in retention.
MR. FLANAGAN: Yes.
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MR. McVEIGH: O.K., thanks.
MR. JOHNSON: Just one more
question, and then we will wind it up.
MR. KRASHAAR: I just want to --
Judah Krashaar from Merrill Lynch. I just
want to clarify the issue of mix and
margin. It would seem to me that your
opportunity here is to shift your high net
worth mix in Fiduciary up dramatically in
coming years, and if you looked at current
margins on the high net worth business
versus the institutional business, is it
fair to assume that that rate of
profitability is higher, and so, as we go
into the future, would the margins of
Fiduciary tend to rise? I'm just
wondering if you could give us some color
in terms of the relative profitability of
both businesses and where that mix will go
in the future.
MR. MAGDOL: Do you want me to?
MS. TATLOCK: Sure.
MR. MAGDOL: I think that's a
very good observation, and I think, from
my perspective, quite clear that the
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margins on growth of the high net worth
business present greater opportunity to
create greater profit margins going
forward, and I think the commitment by
Franklin to use Fiduciary as a platform
for the growth of that business represents
a very exciting opportunity for the
perpetuation of our franchise and the
growth and expansion of that business and
the profitability overall.
MS. TATLOCK: I think the most
important point to go away with in
addition to that is that the high net
worth business affords the institution
stability to its asset base. It is not
business that you have to watch monthly
for asset flows in and out of. If you are
doing your work, those clients stay with
you, and when they die, their children
stay with you and their grandchildren.
It's a different type of business. On the
institution the side, we live with a much
more short-term-oriented client in the
sense that they are all responsible to
report to -- everybody reports to somebody
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either on a monthly or quarterly basis,
it's very performance-oriented as well as
service-oriented. But if you service a
family well, you have that client for
life.
MR. JOHNSON: Thank you very
much. I appreciate your all coming and we
are -- would be happy to answer other
questions either later on or, you know,
you can call Marty back in the office or
our other folks. But we appreciate your
coming, and I think that winds it up.
MS. TATLOCK: Thank you.
(Time noted: 12:05 p.m.)
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