PRUDENTIAL, Britain's largest insurer, agreed to buy fund manager M&G Group for pounds 1.9bn to bulk up in the retail fund business. M&G is Britain's largest unit trust group, managing about pounds 18.5bn. Its Recovery Fund, which manages about pounds 1.4bn, and Growth Fund, with pounds 180m, are among the best- known investment products.

The bid is worth 10 per cent of M & G's total assets, well above the 2.5 per cent to 3.5 per cent seen in recent transactions. "It's a flabbergasting price," said Ben Phillips, a consultant at Boston-based Cerulli Associates, which tracks the global fund-management industry.

Banks and insurers are buying fund managers to profit from growth in personal finance. Prudential's acquisition of M&G gives it a range of unit trusts and personal equity plans designed for retail investors, to sell through Prudential's network of 17,000 independent salesmen and its other direct telephone and banking distribution outlets. M&G sells about half its products directly to the public and the remainder through independent financial advisers.

"Prudential is paying up to get a brand name but it fits into its strategy," said Tim Rees, a fund manager at Clerical Medical Investment Group.

M&G's fund performance, which lagged competitors for several years, improved after a 1997 reorganisation. Prudential has only a small portion of its pounds 128bn under management in unit trusts, although it has been selling its products through new retail channels in the UK to boost sales. It bought Scottish Amicable in 1997 for pounds 2.8bn because it specialised in selling through independent financial advisers.

Prudential also launched Egg,a telephone and computer-based bank, last year. Egg deposits were on track to reach pounds 3bn by the end of February, it said last month. The insurer said it hasn't decided how M&G products will be distributed. The combination of the two companies will generate cost savings of about pounds 10m a year, even though M&G will be run as a separate unit.