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Posted: 6:34 AM- Bank of New York Co. agreed to acquire Mellon Financial Corp. for about $16.5 billion, creating the biggest custodian of assets for institutional investors almost a decade after Mellon rejected a similar bid.
Bank of New York's shareholders will own about 60 percent of the combined company, to be known as Bank of New York Mellon Corp. Bank of New York shareholders will receive 0.9434 shares for each of their shares and Mellon shareholders will get one share for each share they own in Pittsburgh-based Mellon, the companies said in a statement today..
The merger links New York's oldest bank with the institution that helped finance the steel industry in the early 1900s. In 1998, Bank of New York offered to pay $23 billion for Mellon Bank Corp., a bid that was rebuffed by then-Mellon Chairman Frank Cahouet. The combined companies will safeguard $16.6 trillion for institutions, manage $1.1 trillion in invested assets and have combined revenue of about $12 billion a year.
"This is going to create a financial powerhouse, a global- financial services company that's going to be very competitive in asset management and asset servicing," said Gerard Cassidy, an analyst at RBC Capital Markets who rates both "sector perform" and doesn't own either.
Robert Kelly, the 52-year-old chairman and chief executive officer of Mellon, will become CEO of the new company. Thomas Renyi, 60, chairman and CEO of the Bank of New York, will be executive chairman for 18 months.
Gainers in 2006
U.S.-based financial services companies have agreed to spend $267 billion on buying rivals in the country this year, 42 percent more than in the same period last year, data compiled by Bloomberg show.
Shares of Mellon Financial have risen 17 percent this year, giving the company a market value of $16.5 billion. Bank of New York's market capitalization has risen 11 percent to $26.7 billion. Mellon shares fell 18 cents to $40.05 in New York Stock Exchange composite trading on Friday. Bank of New York shares fell 6 cents to $35.48.
Bank of New York said last month third-quarter earnings fell 9.5 percent, the first decline in three years, to $352 million because of costs from its purchase of a JPMorgan Chase & Co. trust unit. Mellon, which owns the Dreyfus mutual funds, said earnings rose 14 percent to $222 million as rising stock prices lifted asset-management and custody fees.
The new company will generate 38 percent of revenue from security-issuing, trade-clearing and treasury services. Asset management and private wealth management will account for 29 percent of revenue, and asset servicing 28 percent.
Deal Hurts Earnings
The transaction will reduce Bank of New York's earnings in 2007 and add to them in 2008, the statement said. Excluding non- cash items such as amortization of intangibles, the deal will add to earnings of both companies in 2007.
The companies said they will cut pretax costs by about $700 million a year, or about 8.5 percent of their combined total, in part by shedding about 3,900 of their 40,000 employees over three years. Restructuring charges will be about $1.3 billion.
"The organic growth of our respective companies is already strong, and the cost savings and revenue synergies opportunities are excellent." Kelly said in the statement.
Bank of New York was founded after the American Revolution in 1784 by Alexander Hamilton to help establish credibility for the country's monetary system, according to Hoover's Inc. Five years later, Hamilton became the first U.S. treasury secretary and negotiated a $200,000 loan -- the first by the new U.S. government -- from Bank of New York.
Close Government Ties
The company went on to provide financing for the War of 1812 and the U.S. Civil War, and in 1878 became a Treasury depository for the sale of government bonds. Bank of New York survived the market crash of 1929 and paid dividends through the Depression.
Bank of New York started making acquisitions after World War II to start offering investment-trust services. The company bought New York-based rival Irving Trust in a hostile takeover in 1989. About eight years later, the company tried and failed to buy Mellon.
Mellon was founded in 1869 by Judge Thomas Mellon, who then gave control of the company to his son Andrew. The bank helped finance Pittsburgh-area companies including Alcoa Inc. and Bethlehem Steel Corp., according to Hoovers. Andrew Mellon later became Treasury secretary in the administrations of U.S. presidents including Warren Harding.
The Mellon family gave up managing control of the company in 1967.
UBS AG and Lazard Ltd. advised Bank of New York, according to the statement. Goldman Sachs Group Inc. advised Bank of New York.