Significant mergers and acquisitions in global custody are likely to continue, experts believe, and rumors are afloat that at least one to two of today's larger U.S.-based players may be absorbed.
According to current market scuttlebutt, Boston's State Street Bank & Trust Co. could be an acquisition target. And Pittsburgh-based Mellon Trust could be an acquisition target or an acquiror.
And just last week, there were reports of talks between Morgan Stanley & Co. and Barclays Bank PLC that could lead to Morgan's acquiring Barclays' global custody business.
In an interview with Pensions & Investments, Marshall N. Carter, State Street's chairman and chief executive officer, nixed speculation that State Street is on the block. "There is no truth to any rumors that we are an acquisition candidate," he said. Mr. Carter also said State Street is not now seeking any major acquisitions in the custody area. In fact, State Street is "introducing a series of value added products to provide total services to clients."
Mellon spokesman Vincent Loporchio had no comment on speculation of any acquisitions. But he rebutted the notion that Mellon is likely to be acquired: "We are strongly committed to our investment management and trust and custody businesses. They are core businesses of Mellon's and important contributors to our bottom line."
But whomever the next acquirors or acquirees prove to be, few experts doubt that more industry consolidation will be coming. The huge cost of technology needed to remain competitive in value-added offerings has proved daunting to some firms, and fees in the core, traditional custody business have been falling.
What's more, each of the markets in which the custodians operate continues to change - in ways ranging from time and means of securities settlements to type of instruments that need to be serviced. These changes require constant reinvestment in custodians' core service, experts say.
Such factors have encouraged industry shrinkage. As William Imhof, practice director at the Alliance of Fiduciary Consultants, Parsippany, N.J., said: "Only the largest players with the largest amount of business can justify the expenses required to be viable in the business."
Thus the list of recent dropouts has included some prominent names in banking and finance. Earlier this year, the Bank of New York completed its acquisitions of the custody businesses of Bank of America, San Francisco, and J.P. Morgan & Co. Inc., New York.
Full bank mergers, such as those between New York's Chemical Banking Corp. and Chase Manhattan Corp. - and the acquisition of Los Angeles' First Interstate Bancorp and San Francisco's Wells Fargo & Co. - resulted in the elimination of more players.
Industry observers foresee at least one to two more mergers of U.S.-based global custody operations. Three ways this might occur: as a fallout from full bank mergers; purchases of other organizations' custody businesses; or so-called strategic alliances, in which a local bank would use an outside global custodian to handle its clients' needs. All could involve cross-border deals.
Mr. Imhof believes a sizable amount of fallout has already occurred among major U.S. players. "Already, we're down to a core eight to 10 players that are really viable," said Mr. Imhof.
"We'll probably see a few more drop out and then get down to four-to-five major players." In his opinion, "there is not room for the current crowd, because there is not enough volume" to support all current players profitably. He would not name possible dropouts.
Bo Abesamis, vice president at Callan Associates Inc. in San Francisco, said about half of the consolidation has already taken place in global custody. In the next five years, today's roster of about eight major players should narrow to about five, he said.
The most likely survivors will be those with the largest assets in global custody and those that can afford "huge annual outlays" of capital needed, he said.
Although Mr. Abesamis also would not name the likely survivors, P&I's survey of global custodians found seven North American organizations with more than $10 billion in global custody assets from U.S. tax-exempt institutions. In addition, there were 11 organizations with more than $100 million in taxable and non-taxable assets under global custody worldwide and two banks - Citibank and Chase Manhattan -handling more than $1 trillion in worldwide global custody.
The six North American-based global custodians that garnered more than $1 billion in new global custody business from U.S. tax-exempt clients in the year ended June: State Street, which gained $78.1 billion; Northern Trust Co., $31.3 billion; Mellon Trust, $9.4 billion; Bank of New York, $5.8 billion; Morgan Stanley Global Custody, $3.2 billion; and Chase Manhattan, $3 billion.
Mergers can make a substantial difference in the size of bank's global custody assets. For the year ended June 30, 1995, Bank of New York reported $150 billion of worldwide global custody assets. But a year later, after two big custody mergers, its reported worldwide non-U.S. assets under custody had hit $494 billion.
"We probably will not do any more custody related acquisitions in 1996. But looking forward, we wouldn't speculate on that," said Thomas Perna, executive vice president at Bank of New York. But "clearly, our strategy is to continue to grow our processing business." He said the business provides BONY with