BOSTON - Standish, Ayer & Wood Inc., which was acquired last week by Mellon Financial Corp., Pittsburgh, will become the "cornerstone" of Mellon Financial's institutional fixed-income business, said Ronald O'Hanley, president of Mellon Institutional Asset Management.
"Standish brings a whole set of important investment products that we haven't had," he said.
Mr. O'Hanley cited Standish's strength in areas such as international fixed income and European corporate bonds.
Boston-based Standish has $41 billion in assets under management, about 92% in fixed income. The firm, which will be called Standish Mellon Asset Management, has $30 billion in U.S. institutional tax-exempt assets.
The acquisition increases Mellon's assets under management to $560 billion.
Mr. O'Hanley would not disclose the terms of the deal. He did say the deal includes an initial cash payment with "very significant" incentive payments structured around investment performance and client retention over the next five years. "They'll be rewarded for serving clients well," he said.
One source cites an initial payment of around $180 million with incentives potentially adding another $150 million to the price tag.
Joshua Dietch, consultant with Cerulli Associates Inc., Boston, said the earn-out strategy is an effective way to get staff to stay on through the merger and see it work.
`A scale game'
The merger looks like a good fit for both firms, he said. Mellon and its scale provide Standish with the opportunity to boost its business without having to invest its own capital.
"Fixed income is a scale game," he said.
He doesn't expect Mellon to have any problems integrating Standish into its group of managers, and expects Mellon will take advantage of synergies where they exist.
The deal is expected to close next quarter.
Rumors that Standish has been on the block have been swirling since last year. Thomas Sorbo, chief operating officer at the firm, said a number of avenues were considered such as partnerships, subadvisory relationships and mergers.
Standish Chief Executive Officer Richard Wood said that after preliminary discussion with several suitors, the field quickly narrowed to Mellon. "We were immediately impressed with their knowledge of the institutional and high-net-worth business," he said.
Standish, Ayer & Wood Chairman Edward Ladd said he was "excited" about the deal. He said there's a lot of synergy between the two firms and he believes the access to Mellon's global distribution channels will make his firm more competitive.
Two deciding factors, said Mr. Ladd, were the cultural fit with Mellon and the incentive package.
He called the design of the incentive package "cutting edge" and that all 46 Standish executives that have ownership in the company approved of the deal.
Messrs. O'Hanley and Ladd said that talks between the two firms never stalled. "It was just a matter of getting it done right," said Mr. O'Hanley. The perceived delay, he said, was in hammering out a deal that he called "unique" in structure.
Mr. Wood said he doesn't expect any staff turnover as a result of the merger other than through typical circumstances such as retirement.
No big changes
There will be no changes to the firm's investment philosophy or leadership, said Mr. Ladd. "The key is continuity." Standish Mellon will be led by a four-member office of the chairmen, which will consist of Standish's Messrs. Ladd, Wood and Sorbo, and Mellon Institutional's Scott Powers, executive vice president.
Mr. Ladd said the firm has made an effort to keep clients informed on its potential sale. He doesn't think news of the deal will come as a great surprise to many of them. "Clients have been well prepared for it," he said, terming initial client reaction to the news "very positive."
Officials from the $32 billion State Retirement and Pension System of Maryland, Baltimore, said they will review the impact of the deal on Standish. "We'll give it very careful scrutiny," said Richard Dixon, state treasurer, who oversees the pension fund. Standish runs $1.5 billion in fixed income for Maryland.
Mr. Dixon said the board reviews all manager mergers with a focus on making sure investment staff doesn't leave and the investment philosophy remains in place. He said the board has been pleased with Standish's performance.