The Bank of New York has agreed to buy Mellon Financial Corporation in a deal that will create a bank capitalized at $43 billion that the two parties describe as “the largest securities servicing and asset management firm globally.” The new company, which will be called The Bank of New York Mellon Corporation, will have $16.6 trillion in assets under custody, $8 trillion in assets under trusteeship, and $1.1 trillion in assets under management.
The combined company today has annual revenues of more than $12 billion, with approximately 28% derived from asset servicing, 38% from issuer services, clearing services and treasury services, and 29% from asset management and private wealth management. Almost a quarter of combined revenue will be derived internationally.
With a combined pro forma market capitalization of approximately $43 billion, The Bank of New York Mellon Corporation will be the 11th largest U.S. financial institution. The companies expect to reduce total pre-tax costs by approximately $700 million per year, or approximately 8.5% of the estimated 2006 combined expense base. The companies’ combined payroll of 40,000 is expected to be reduced by approximately 3,900 over a three-year period following the transaction. The companies say they will reduce headcount through normal attrition wherever possible, and will provide “extensive support” to employees impacted by the merger. The transaction will involve restructuring charges of approximately $1.3 billion.
In a statement, Bank of New York and Mellon say the combined banks are “well positioned to capitalize on global growth trends, including the evolution of emerging markets, the growth of hedge funds and alternative asset classes, the increasing need for more complex financial products and services, and the increasingly global need for people to save and invest for retirement.” Under the terms of the agreement, The Bank of New York’s shareholders will receive 0.9434 shares in the new company for each share of The Bank of New York that they own and Mellon shareholders will receive one share in the new company for each Mellon share they own. The Bank of New York and Mellon have entered into mutual stock option agreements for 19.9% of the issuer’s outstanding common stock.
In terms of management, Tom Renyi, currently chairman and chief executive of The Bank of New York, will serve as executive chairman of The Bank of New York Mellon Corporation for 18 months following the close of the transaction with overall responsibility for the integration of the two companies.
Bob Kelly, currently president, chairman and chief executive officer of Mellon, will serve as chief executive officer of the new company and will succeed Renyi as chairman of the board. Gerald L. Hassell, currently president of The Bank of New York, will hold the same position in the new company.
The board of directors will have 10 members designated by The Bank of New York and eight members designated by Mellon. The new company’s headquarters will be based in New York City, but the new company will maintain “a strong and growing” presence in Pittsburgh.
“We are creating one of the world’s leading financial services growth companies,” says Renyi. “Both our companies focus their businesses in highly attractive sectors of the financial services industry. Together, we will be the global leader in securities servicing, and one of the top providers of asset and wealth management worldwide. Together, we will have the scale, the technology, the capital, and the people we need to compete and win in the rapidly expanding global marketplace. We will be fully focused on delivering the high quality service our customers deserve as we create rewarding opportunities for our employees and superior returns for our shareholders. In addition, our balanced business mix and widespread geographic diversification will position us to move and manage our clients’ assets with the proven expertise and experience that few global companies can match.”
“The merger creates an extraordinarily strong and rapidly growing global competitor in our core businesses,” says Kelly. “Through this merger, we will be able to invest and expand more effectively than any of our competitors due to our combined scale, profitability and global reach. The organic growth of our respective companies is already strong, and the cost savings and revenue synergies opportunities are excellent. Together, we will have the best service in the world, strong investment performance and the highest fiduciary standards. Today’s action is clearly in the best long-term interests of our customers, shareholders and employees, as well as the city of Pittsburgh, where we will increase our very strong commitment to the community. We expect Pittsburgh to be home for several business divisions, as well as making it a center of excellence for technology, operations and administration.”
The transaction has been unanimously approved by each company’s board of directors and is expected to be completed early in the third quarter of 2007, subject to regulatory and shareholder approvals.
Assuming the achievement of planned synergies, on a GAAP basis the transaction is expected to be 1.0% dilutive to The Bank of New York’s operating earnings in 2007, and 1.4% accretive in 2008; it will be 1.0% accretive to Mellon’s operating earnings in 2007, and 5.7% accretive in 2008. On a cash basis, which excludes the impact of non-cash items such as the amortization of intangibles, the transaction is expected to be 1.1% accretive to The Bank of New York’s earnings in 2007, and 5.3% accretive in 2008; it will be 4.5% accretive to Mellon’s earnings in 2007, and 11.9% accretive in 2008. The Bank of New York was represented in the transaction by the investment banking firm of Goldman Sachs and the law firm of Sullivan & Cromwell. Mellon was represented by UBS Investment Bank and Lazard and the law firms of Simpson Thacher & Bartlett LLP and Reed Smith LLP.