BNY-Mellon deal puts 2006 in record book

Bank of New York Co.'s surprise move to purchase Mellon Financial Corp. in the largest money manager deal in history lifts the value of money management merger and acquisition deals announced this year to more than $36 billion, erasing the previous record of $30.9 billion set in 2000.

That value milestone had been one of the few marks still standing on Nov. 15, when New York-based investment bank Putnam Lovell NBF Securities released figures showing a record-breaking pace of money management M&A in 2006 in terms of number of overall deals, assets under management changing hands and deals involving alternative asset managers.

Despite that record-setting clip, the value of deals through mid-November stood at $20.1 billion, more than $10 billion below the total for 2000, Putnam Lovell said. Even the anticipated sale of Marsh & McLennan Cos.' Putnam Investments subsidiary for around $4 billion wouldn't have been enough to topple the old mark.

But, on Nov. 21, Bank of America Corp. announced it was buying U.S. Trust Corp. for $3.3 billion. On Dec. 4, Bank of New York and Pittsburgh-based Mellon Financial announced they would marry their respective strengths in asset servicing and asset management.

Reflecting the fact that roughly 80% of Mellon's earnings come from the money management side of its business, Putnam Lovell pegged the money management-only value of the $16.5 billion stock-only transaction at $13.3 billion. (By comparison, BlackRock Inc. purchased Merrill Lynch Investment Managers for $9.6 billion in February.)

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.

Within Mellon Financial, active cross-selling efforts have left the Pittsburgh-based company with $1 billion of annual revenue coming from clients for which Mellon offers both asset servicing and asset management — an area that Bank of New York, with its smaller money management arm, hasn't been able to pursue to the same extent, noted Mr. O'Hanley. "We'll be able to, at some level, do the same thing with their clients that we do with ours," he said.

Burton J. Greenwald, president of Philadelphia-based financial services and mutual fund consulting firm BJ Greenwald Associates, said the addition of the BNY Hamilton mutual fund family, with less than $20 billion in mostly money market assets, will do little to balance Mellon's existing focus on institutional clients or bolster its Dreyfus mutual fund lineup. Still, he said, the combination should make BNY Mellon a much tougher competitor in wealth management.

Asked whether BNY-Mellon will remain on the hunt in the asset management sector, Mr. O'Hanley said, "You can be pretty sure we won't be announcing an acquisition of any kind of size in the short term. … We've got a lot of work to do." Still, market watchers say after executing a spate of acquisitions and joint ventures in recent years, Mr. O'Hanley isn't likely to be absent from the M&A scene for long.

Even with Mellon on the sidelines for now, investment bankers say the ripple effects of that company's latest deal with BNY should be good for M&A business. Putnam Lovell's Mr. Hartley said that with the BNY-Mellon transaction, following on the heels of BlackRock Inc.'s February purchase of Merrill Lynch Investment Managers, players across the board are re-examining their assumptions — an environment that should lead to "a significant pickup in M&A."