Bank of New York will have trouble digesting the global and domestic custody businesses of J.P. Morgan & Co. and Bank of America, industry sources predict.
Overlapping services, coupled with the loss of several hundred back-office jobs, are among the hurdles if the proposed acquisitions are completed.
In a service business where relationships are key, BONY probably will retain many of the client service staffers from the operations it is purchasing.
Each of the three operations focuses on domestic custody. Only J.P. Morgan has significant exposure to the global custody market, with more than $30 billion in global custodial assets. Morgan has several European global custody clients and a major base of operations in Brussels. By comparison, Chase Manhattan Bank has more than $600 billion in global custody assets and Citibank has about $300 billion.
According to sources, BONY has extended offers to retain about 500 of the 1,000 J.P. Morgan custody employees, most of whom are client service and senior account representatives.
A senior Bank of America official who wished to remain unidentified said he expects BONY to retain between 600 and 700 of the estimated 2,000 BofA institutional custody and trust employees. Most of those to be retained are client service or financial and technical specialists.
Some BONY competitors and consultants say service may suffer while the three organizations are merged, a process that may extend through the middle of 1996. Back-office problems are probable as systems and operations are changed, and as areas are consolidated, they said.
Some institutional clients of J.P. Morgan and BofA have indicated they will consider other providers as a result of the proposed acquisitions. Noted Carlos Resendez, chief investment officer the $12 billion Texas Permanent School Fund, Austin, a BofA client: "Service will be affected. With new systems in place, new employees trying to learn the BONY system, it will affect things for a time."
Texas Permanent is about to complete a search for a custodian. The search began when fund officials learned BofA would be acquired by BONY. BONY is among the finalists in the search, which will be completed this week.
But the BofA official said during the transition, BONY will emphasize client service and retention.
Indeed, relationships are what separate one provider from another in the domestic custody business, industry observers say.
"Relationships are what this business is all about. Domestic custody has become a commoditized operation with a fixed cost base," said an official at a major money center bank.
He said it will be critical for BONY to retain the Morgan "global culture." He pointed out BONY manages its domestic custody service in a centralized fashion, but the Morgan global custody service "is managed as much in Europe as in the United States."
He did note, however, that by acquiring Morgan's global custody business, "if they manage to retain many or most of the Morgan people they may become a presence .*.*. but it is a good bet that some of the Morgan people are going to leave."
Before the acquisition, BONY was not a factor in the global custody market. It was already a key player in the domestic custody business, with $1.6 trillion in domestic custody assets.
While BONY is expected to try to retain as many of the BofA and Morgan account servicing representatives as possible, many of the back-office staff of the acquired banks may be left out in the cold.
Typically, a client servicing representative is the single point of contact between a pension fund or other institution and the custodian. Behind the scenes are scores of other professionals including those involved in accounting, cash services, information delivery, securities lending, reporting, transaction settlement, performance measurement and other services. It is these latter positions that likely will overlap among the three banks.
Plus, the custody business requires a significant investment in systems, one investment management consultant noted.
"Obviously I can't speculate about any of these company specifically, but any time you buy a bank you are buying market share. They will probably put the systems side by side and see which is the best, and transition clients to whichever they feel is best. But I can tell you this, BONY is comfortable with its systems," said the consultant.
He said the "rational thing" for BONY to do is retain as many of the acquired institutions' client service or "relationship officers" as possible and focus on its own systems and back-office employees.
In each custody bank there are three classes of staffing, he said: the "relationship people;" the technical support staff and some financial specialists; and, finally, there are the "worker bees" who provide record keeping, accounting and other information delivery services.
"I would expect them to retain as many relationship officers as they can. The second group ..... will probably be picked up individually as needed. The third group is the most familiar with the acquired bank's systems but the purchasing bank already has its systems in place and this group is probably replaceable or already exists at BONY," said the consultant.