Five real estate money managers - Koll Realty Advisors, Cabot Partners, MIG Realty Advisors, Sentinel Real Estate and Prentiss Properties Realty - are bidding to purchase Mellon/McMahan Real Estate Advisors Inc., sources say.
The $2 billion San Francisco-based real estate investment management firm was put on the block by Mellon Bank Corp., Pittsburgh, in what appears to be another step toward refocusing Mellon's involvement in investment management.
Robert Angland, president of Cabot Partners L.P., Boston, would not confirm or deny the reports; representatives for the other companies did not return phone calls. An unidentified venture capital firm also was mentioned as being a potential purchaser.
A Mellon Bank spokeswoman would only say "we are exploring the sale of Mellon/McMahan," but would not elaborate beyond that. She would not confirm whether bids had been solicited or received, or whether bidders were being considered.
Mellon informed clients of the development early this year. The company said due diligence was under way with five firms and it expected to select one by the end of February and to close the transaction by the end of April.
Patricia Weigert, chief executive officer of the Contra Costa County Employees' Retirement Association, Concord, Calif., said Mellon officials told her "the bank felt ... the focus needed to be changed. For that reason they were 'disengaging' - that was their word," she said.
Recent communications from Mellon have stated Mellon has a new direction, one that does not include real estate, said Kevin Lynch, principal with The Townsend Group, Cleveland.
Mellon has stepped up its involvement in the mutual fund and 401(k) business recently. It reached an agreement to acquire Dreyfus Corp. in a $1.8 billion stock swap in late 1993, a merger that will create a company with a combined $215 billion in assets, including $84 billion in mutual funds.
Other observers speculated real estate's lackluster performance in recent years could be another reason for Mellon's lack of interest in the asset class. The Pensions & Investments' 1993 survey of real estate investment advisers found most of the pension fund investments in commingled real estate funds would not meet the return projections made by managers (P&I, Sept. 20).
Mellon/McMahan ranked 16th among real estate firms in the P&I survey, with $2.14 billion in tax-exempt assets under management. The firm's institutional clients include Northern Illinois Gas, Southwestern Bell Corp., NYNEX Corp. and the Contra Costa County system.
Mellon/McMahan experienced a growth spurt of 142% last year, thanks to Mellon Bank's acquisition of The Boston Co. Inc. in late 1993. The $1.45 billion transaction resulted in the merger of Mellon/McMahan with the Boston Co.'s real estate subsidiary, Boston Co. Real Estate Counsel Inc.
In the P&I survey, Sentinel was 19th, with $1.94 billion in total assets; MIG placed 22nd, with $1.62 billion; Cabot came in at 50, with $452 million; and Prentiss came in at 63, with $153 million.
Contra Costa's Ms. Weigert said she was told by Mellon officials there are three to five potential purchasers some of which could assume control of Mellon/McMahan with no noticeable change for clients but that, in the case of one potential purchaser, the officials suspected the purchase could result in substantial amounts of restructuring. She was told to expect more information in late February.
Contra Costa trustees likely will re-evaluate their $47 million allocation based on the outcome of the bidding, said Ms. Weigert.
"It would be imprudent of the board not to re-evaluate their relationship with the firm. Something of that magnitude should not go unnoticed," she said.
Ed Roche, director of administration of the $18.44 billion NYNEX fund, said a change in ownership usually would make the fund re-evaluate the manager.
"Any time there is any change of ownership we look to see if that is in keeping with what we want," said Mr. Roche.
"While any change of owner in any asset class may lead us to see if the mandate that we've given these investment managers continues, the ultimate ownership doesn't bother us."
One way or another, pension fund clients are bound to feel some effects while Mellon/McMahan and its purchaser merge, said one money manager.
"It's a major event either way. There's a lot of client events at stake," said the manager. "Every time a manager is sold there are a lot of client events that have to be taken care of."