FRIENDS Provident Life Office said it agreed to buy London & Manchester Group for pounds 744 million to expand and cut costs as it combines their insurance and fund management businesses.

Friends Provident, which is owned by its policyholders, said it will buy L&M for 600p per share in cash. That's a premium of of 18 per cent above the closing price of its shares the day before the announcement.

"It looks a reasonable price," said John Hatherly, the head of research at M&G Investment Management. "We're reasonably happy." L&M shares jumped immediately to 600p and closed on Friday at 595p.

UK companies are also seeking increased assets and distribution networks ahead of pension reform, which is expected to boost demand for pensions as the government calls on citizens to fund a greater portion of their own retirement. The merger will combine Friends Provident's pounds 25bn of assets under management with L&M's pounds 5bn. Friends Provident took control of Edinburgh-based fund manager Ivory & Sime last year.

L&M chief executive Thomas Pyne said last month the company had developed a strong business selling pensions to local authorities which wanted private companies to provide pensions rather than doing them in-house.

"I would have thought that most of L&M shareholders would take the money," said Tom Rayner, an analyst at SG Securities. "We'd remain holders as there might be a counter-bid."

The companies declined to comment on cost savings or the number of possible job cuts. A reduction in staff is likely to occur in both companies through "normal staff turnover." Even so, job cuts probably will be made at L&M's offices in Exeter and among Friends Provident staff in Dorking.