Some investment bankers see the BNY-Mellon combination adding further fuel to the M&A fire.
Roger Hartley, a managing director with Putnam Lovell NBF in San Francisco, predicted the "very smart" BNY-Mellon deal will produce a top-notch global competitor, pressuring both "people further down the list in asset servicing" and "people who have yet to determine whether asset management is a core business."
Asset servicing, rather than asset management, was the primary driver behind the BNY-Mellon deal, executives from both companies said.
Adding Mellon's fifth-ranked $4.4 trillion in assets under custody to Bank of New York's second-place $12.2 trillion total would easily push the combined entity past J.P. Morgan Chase & Co.'s market-leading $12.9 trillion in a sector where scale leads to competitive advantage.
Still, the compelling logic of matching Mellon's subscale asset servicing unit and muscular asset management arm with BNY's strong servicing and relatively small asset management operations prompted investors to chase both companies' stocks higher when the deal was announced on Dec. 4. BNY's shares closed up 12% on the day, while Mellon's shares rose 6.8%. Even after some minor profit taking, the Dec. 7 close of $39.51 for BNY's stock was still up 11% from its pre-announcement close, while at $42.45 Mellon's stock was up 6%.
"The rationale for doing this was not money management," but the charms of combining the two companies' respective operations in that sector clearly added to the market's embrace of the deal, said Ronald O'Hanley, chief executive officer of Mellon Asset Management, whose subsidiaries managed a total of $918 billion as of Sept. 30. The company picked up another $30 billion from Mellon's Oct. 1 acquisition of Edinburgh-based Walter Scott & Partners Ltd.
When the deal was announced, executives from the two companies said BNY Mellon would be the 10th largest global asset management company with $1.01 trillion under management, as well as the fifth largest U.S. asset manager, using Dec. 31, 2005, data. Mellon had been the 13th largest global asset management company.
In addition, the combination of Mellon's $92 billion in high-net-worth client assets, good for 17th place among U.S. wealth managers, when merged with BNY's 20th-place total of $60 billion, would lift BNY Mellon to ninth place with $152 billion, according to information from the companies.
In an interview, Steven Pisarkiewicz, executive vice president of Bank of New York and head of BNY Asset Management, said BNY — with $179 billion in assets under management — has focused on building "our beta and indexing businesses" at one end of the spectrum and "alpha generators" at the other. Those include real estate investment subsidiary Urdang Capital Management Inc., with $4 billion in assets; hedge fund of funds Ivy Asset Management, with $15 billion; and collateralized loan and debt obligation manager Alcentra Inc., with more than $10 billion. By contrast, Mellon's strength is mostly in the middle of that spectrum: traditional equity and fixed-income management with subsidiaries such as The Boston Company, with $67 billion under management; and Standish Mellon, with $152 billion.
"Their traditional approaches to asset management will fit nicely with our focus on indexing and alpha generation," he said.
Mellon, of course, already has a presence in all segments of the spectrum. Mellon spokesman Joseph Ailinger said affiliates Mellon Capital Management, EACM Advisors, Pareto Investment Management Ltd. and Franklin Portfolio Associates manage more than $25 billion combined in alternative assets, including hedge funds, hedge funds of funds, market neutral, portable alpha, absolute return and currency overlay strategies. And Mellon Capital Management, Mellon Equity Associates and Standish Mellon have more than $65 billion in index assets between them, he said.Even so, Mr. O'Hanley said BNY units such as Urdang and Alcentra bring capabilities in real estate and structured debt that he had long been looking to add to Mellon's multiboutique asset management lineup.
It's too early to say which, if any, of BNY's equity or fixed-income strategies will be woven into existing Mellon units, but the integration isn't likely to be a large-scale challenge, Mr. O'Hanley said.
"This transaction isn't predicated on anything happening or not happening in the asset management area, giving us the luxury of time," said Mr. O'Hanley. "Once the merger is complete, we'll start the process of bringing to clients the best of our combined offerings."
A year after some influential investors called on Mellon to maximize returns for shareholders by selling off its asset management arm, Mr. O'Hanley said combining BNY and Mellon sets the stage for building an enterprise that is a leading competitor in both asset servicing and asset management.