Bank of New York agreed to buy Mellon Financial for $16.5 billion, combining two storied names in American finance to create a powerhouse in custody services for institutional investors and one of the biggest asset managers.
The combined company, to be called Bank of New York Mellon, will rank first worldwide with $16.6 trillion of assets under administration, surpassing JPMorgan Chase. It will rank 10th in asset management and 9th in wealth management, overseeing more than $1.1 trillion of assets.
About 3,900 of a combined 40,000 jobs will be shed over three years to help save $700 million, or 8.5% of costs, by 2010, the companies said. Restructuring charges will total $805 million after taxes, they said, and combined annual revenue is about $12.5 billion.
"It is a complementary combination that, with strong leadership, could produce above-average earnings growth," said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine, who rates both companies "neutral."
Mellon shares closed up, while Bank of New York soared.
Bank of New York shareholders will own 63% of the new company. They will get 0.9434 of a share, and Mellon shareholders will get one share for each of their shares. Bank of New York will designate 10 directors, while Mellon will designate eight. A closing is expected around July 1, 2007.
Based in New York
The new company will be based in New York, but keep cash management and stock transfer units in Pittsburgh, where Mellon is based. It will generate about 29 percent of revenue from asset and private wealth management, 28% from asset servicing, 20% from treasury and clearing services and 18 percent from issuer services.
Founded in 1869, Mellon helped finance the growth of the U.S. steel industry. Andrew Mellon, the financier and philanthropist, took over in 1882 when his father Thomas retired, and later served as U.S. Treasury Secretary.
Bank of New York was founded in 1784 by Alexander Hamilton, later the first Treasury Secretary of the United States.
Robert Kelly, 52, Mellon's chief executive since February, will become chief executive at the new company. Bank of New York Chief Executive Thomas Renyi, 60, will become executive chairman for 18 months after the closing and then retire.
Renyi will oversee the integration. He called the transaction a "transformational merger," amid a push among many financial services companies to add scale and cut costs.
Both companies have over time shed banking operations in favor of fee-based businesses. Mellon's units include the Dreyfus mutual funds.
"Their businesses tend to be scale businesses (that) benefit from size," said Richard Bove, an analyst at Punk Ziegel & Co.
Bank of New York expects the merger to reduce earnings in 2007 and add to them in 2008, while Mellon expects a boost in 2007. The companies expect a 19 percent internal rate of return.
In 1998, Mellon rebuffed an unsolicited $24 billion takeover bid by Bank of New York, which Renyi led at the time.
Renyi said he approached Kelly in late September after the latter expressed interest in buying an asset manager. Last December, Mellon shareholder Highfields Capital Management LP called on the company to split up.
In memoranda to their respective companies' employees, Renyi and Kelly said job cuts would be made through attrition where possible, and that "it is too early to determine exactly where the impact will be felt."
Kelly said he called Pittsburgh Mayor Luke Ravenstahl, Pennsylvania Governor Edward Rendell and other government leaders to discuss the impact on Pittsburgh.
Adding Jobs in Pittsburgh
He said Mellon plans to add 1,000 to 2,000 jobs in the city within three to five years. "Because of Mellon's historical importance, we unilaterally understood the advantages to a Pittsburgh location," including lower labor costs, he said.
A spokesman for the mayor said "early indications are that perhaps this is a very good thing for the city."
Shares of securities servicing rivals Northern Trust and State Street rose on hopes that both might gain market share.
"Mergers of competitors often come with ripe opportunities to win business away," wrote Banc of America Securities analyst Kenneth Usdin.
Bank of New York in October swapped its 339-branch banking network for JPMorgan's corporate trust business. "Bank of New York will be undergoing two major integrations at one time," Cassidy said.