THE BUY SIDE - Rose-Colored Glasses

It was a less than ideal American debut for Raymond McFeetors, CEO of Canada's Great-West Lifeco, the unit of Montreal-based Power Financial Corp. that announced its $3.9 billion acquisition of money manager Putnam Investments on February 1. After conducting a press conference and analyst briefing from Great-West's Winnipeg headquarters, McFeetors flew in triumph to Putnam's home city of Boston only to be held up for hours by immigration officials at Logan Airport, just a week after the U.S. tightened passport rules for travelers entering from Canada. McFeetors and Power Financial's owners -- Canada's wealthy Desmarais family -- are hoping that the acquisition proceeds more smoothly.

Building on the foothold of Great-West's U.S. subsidiary, Great-West Life & Annuity Insurance Co., the Putnam deal is the first step in the Desmarais's plan to grow their mutual fund business outside Canada, where Power Financial is the largest of three dominant fund complexes, with about $93 billion in assets. "We are already more than twice the size of the next guy," says chairman Robert Gratton.

The firm is making a bold -- and potentially costly -- bet. As of December 31, Putnam had $192 billion in assets, down 54 percent from 2000 as a result of spotty performance and massive investor withdrawals in the wake of its involvement in the 2003 market-timing scandals. With net flows still negative and Putnam's industry-lagging operating margin checking in at 20 percent, Great-West is paying 14.5 times its estimate of Putnam's 2007 earnings. That's two thirds the average multiple paid for a U.S. money manager. But the discount could shrink if Power Financial's ambitious goal of a 40 percent improvement in Putnam's operating margin doesn't materialize, as projected, within a year of finalizing the deal, which is expected to close in the second quarter.

McFeetors insists that he didn't overpay and that the goal -- $90 million in incremental profit this year -- is within reach. "We pressure-tested the numbers," he told analysts on the February 1 conference call. "These are the numbers we think are going to be achievable."

To make it happen, McFeetors is counting on Putnam CEO Charles (Ed) Haldeman Jr., who has been executing a turnaround plan and will stay on to lead the firm. About two thirds of this year's profit growth will come from cost cutting. Haldeman, who has already reduced the money manager's head count by half, to 3,000 employees, will need to slash an additional $60 million from Putnam's annual operating expenses of about $1 billion.

Revenue growth could prove more challenging. Last year investors withdrew a net $20.9 billion from Putnam; that's less than the $33.5 billion they extracted in 2005, but a dismal showing nonetheless. With the firm's ownership situation now clarified -- rumors of a sale had been swirling since September -- Haldeman expects net outflows to drop to just $900 million this year.

Some analysts are skeptical. Mario Mandonca of Toronto brokerage Genuity Capital Markets figures that Putnam's 2007 net outflows will be $11 billion and that positive net inflows are a ways off. "By 2008 they might be flat," he says. "It's anyone's guess."