What was the strategic rationale behind the merger of Mellon and Bank of New York? The main rationale for the merger is that it fits well with the strategies of both banks. Bank of New York and Mellon are both well-managed firms with specific strategies for growth that complement each other well. Although slightly different in their core functions, both banks are focused primarily on Asset Management and Securities Servicing; Mellon having a stronger market position in the former and BNY the latter. Each firm wants to grow the sub-segment where the other firm is strongest.
In addition to the basic want for what the other has, the two banks have compiled a long list of expected cost saving synergies. Overall, they expect to save $700 million annually. Since they’re both financial service providers, these cost savings come mainly through the reduction of overlapping staff. Furthermore, the combined company will have a stronger presence along the investment value chain, giving rise to potential cost drivers through instances of vertical integration and potentially favorable transfer pricing.
On the customer value side, a strengthened product line and increased complementarity will help to differentiate them in an industry where differentiation is not easy. 2. What are the impediments to the deal? The major impediment is the price, or the stock exchange ratio. Mellon shareholders are positioned to see an increase to EPS, but would not receive a premium on share price, which has historically been seen among acquired firms. Even with an increase to EPS, shareholders will likely not respond well to not receiving a premium.
Another impediment to the deal is Mellon’s longstanding relationship with the city of Pittsburg. In addition to the history of the two entities, Mellon has played a significant role in Pittsburg’s economy, culture, and employment. Pittsburg is a large stakeholder in this deal and Mellon is determined to protect their interests. This creates problems because Bank of New York insists on keeping the headquarters in New York. 3. Is the deal worth doing given these barriers? If so, why?
At this point, there has already been significant consolidation within the industry and both firms have committed to growing through consolidation. Finding a more appropriate partner will be difficult for either firm. Assuming the synergy numbers are attainable, this is a great merger opportunity. The concern over the price discount should be alleviated by the favorable EPS forecast and likely price appreciation to follow with the synergies. Also, the premium typically arises following a traditional acquisition.
This is closer to a merger of two equals, so a discount should not be considered a deal-breaker. As for Mellon’s commitment to Pittsburg, Bank of New York has made significant concessions in the way of job locations and charitable donation commitments. Pittsburg stands to gain more jobs as a result of the merger. This, combined with the practical reasons for having a financial institution headquarted in New York City, should be more than enough reason to push forward with the deal.