Old Mutual is hoping that Harold Baxter and Gary Pilgrim are about to put their noses to the grindstone. The London-based firm has restructured its agreement with the principals of affiliate Pilgrim Baxter to reward profit growth rather than revenue growth. The firm purchased Pilgrim Baxter as a part of its UAM acquisition in September of 2000.

The focus on profits may be an easier hurdle to achieve now that the bear market is capping asset growth in the fund industry. Old Mutual admitted that the new plan makes it more likely to be able to attract and retain executives. Without asset growth, firms are finding it difficult to grow revenues compared to two years ago.

Old Mutual executives say that they like the deal because it focuses Pilgrim and Baxter on the bottom line. The new structure jibes with the current market, which is now more likely to reward firms growing the bottom, and not the top line.

Under the original terms of the deal, Old Mutual was to pay Baxter and Pilgrim a one-fifth share of the firm's revenues. The new structure will instead take the form of an earn-out if profits exceed targets over the next five years.

The pair will be paid a minimum of $175 million over the course of three annual payments starting this month under the announced terms. The first payment of $58.3 million will be made in cash. In each of the next two payments, a third of the amount may take the form of Old Mutual shares.

In addition to the guaranteed payment, Old Mutual also agreed to pay an "earn out" over five years if Pilgrim Baxter grows profits by more than 7.5 percent annually over the period.

The five annual earn-out payments are start in February 2004 and run through 2008. They kick in if profits grow at least 7.5 percent per year from a base of $53.6 million. If annual profit growth is in excess of 15 annually, they earn then each yearly payment of $18.2 million. The largest payment is $68.2 million if profits growth is equal to, or greater than, 30 percent per annum.  

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