Bank of New York to buy Mellon Financial for $17 bn
Bank of New York on Monday agreed to buy Mellon Financial for $16.5 billion, combining two storied names in American finance to create a powerhouse in asset management and custody services for institutional investors.
Bank of New York shareholders will own 63% of the company. They will get 0.9434 of a share and Mellon stockholders will get one share for each of their shares in a new company to be called Bank of New York Mellon.
The combined company will be based in New York, but expects to keep cash management and stock transfer units in Pittsburgh. About 3,900 of a combined 40,000 jobs will be eliminated over three years to help save $700 million annually. Restructuring charges will total about $1.3 billion.
Both companies have similar business models, and have over time shed banking operations in favour of fee-based businesses. Mellon’s units include the Dreyfus mutual funds.
“At first glance, people have to be pleased with this deal,” said Gerard Cassidy, an RBC Capital Markets analyst who rates both companies ‘neutral.’ “It is a complementary combination that, with strong leadership, could produce above-average earnings growth.”
Robert Kelly, Mellon’s chief executive since February, will retain that position, while Bank of New York chief executive Thomas Renyi will become executive chairman for 18 months after the closing, expected early in the third quarter of 2007.
Renyi will oversee the companies’ integration. He called the transaction a ‘transformational merger.’ Founded in 1869, Pittsburgh-based Mellon was known for helping finance the growth of the US steel industry. Andrew Mellon, who took over Mellon in 1882 when his father retired, later served as US Treasury Secretary.
Bank of New York was founded in 1784 by Alexander Hamilton, later the first Treasury Secretary. In pre-market electronic trading, Bank of New York shares rose $3.02, or 8.5%, to $38.50, while Mellon rose $1.75, or 4.4%, to $41.80.
Combined, the companies will have about $12.5 billion of annual revenue, with about 38% from issuer, trade clearing and Treasury services, 29% from asset and private wealth management, and 28% from asset servicing.
It will rank first worldwide with more than $16 trillion of assets under custody, and rank in the top 10 with more than $1.1 trillion of assets under management. “Their businesses tend to be scale businesses (that) benefit from size,” said Richard Bove, an analyst at Punk Ziegel.
In 1998, Mellon had rebuffed an unsolicited $24 billion takeover bid by Bank of New York, which Renyi led at the time. Renyi said he approached Kelly in late September after the latter expressed interest in buying an asset manager.
Kelly said he called Pittsburgh Mayor Luke Ravenstahl, Pennsylvania Governor Edward Rendell and other government leaders to discuss the merger’s impact on Pittsburgh.
He said “we are committed to creating 1,000 to 2,000 jobs in the city,” and that “because of Mellon’s historical importance, we unilaterally understood the advantages to a Pittsburgh location,” including lower labour costs.
The merger would leave Northern Trust and State Street the only major rivals in the low-margin area of securities servicing.
Cassidy said both could win market share from investors who don’t want to funnel all their business to a single company. “I don’t see pressure on either to combine,” he said. Bank of New York expects the merger to add to operating earnings by 2008, and Mellon by 2007.
Takeover speculation has long surrounded Mellon. Highfields Capital Management, a Boston hedge fund, last December urged it to split its operations to help boost its share price.
Bank of New York in October swapped its branch network for JPMorgan Chase’s corporate trust business. “Bank of New York will be undergoing two major integrations at one time,” Casksidy said. “That’s an armful for anyone.”
Goldman Sachs and the law firm Sullivan & Cromwell advised Bank of New York. UBS and the law firms Simpson Thacher & Bartlett and Reed Smith advised Mellon.
Source:
