Bank of New York stymied in plan to shed back-office operations.

Bank of New York Stymied in Plan To Shed Back-Office Operations

NEW YORK -- Bank of New York Co. has shelved its unusual effort to sell some core processing operations after two potential bidders failed to meet the steep asking price, sources familiar with the talks said.

The company was seeking $400 million to $500 million for four back office units: credit cards, funds transfer, corporate trust, and check clearing operations.

Bank of New York planned to retain loan portfolios and customer relationships but sell computers and technical and administrative staff.

A sale was discussed with EDS Corp. and International Business Machines Corp., but each thought the price was too high, according to the sources. Both companies are interested in establishing a processing operation in New York that could provide services to a number of banks.

Bank officials declined to comment on the negotiations, as did EDS and IBM. It's possible the discussions could be revived, the sources said.

The talks marked the first time that a large bank tried to bundle a number of its operations units and sell them, consultants said.

A number of banks and thrifts already pay outside firms to run their back offices for a flat fee. These arrangements, known as outsourcing, have become popular as banks have come under increasing pressure to reduce costs.

But the Bank of New York plan had unusual aspects. For one thing, the purchaser would have been able to use the acquired equipment and personnel to process transactions for other banks, driving up the value of the deal.

For another, Bank of New York would pinpoint the operations that would be handled outside, rather than turning over its whole back office. For example, Bank of New York would have retained its lucrative securities-processing service. In 1990, 38% of operating revenues came from fee-based businesses; and securities processing generated a significant portion of this business, analysts believe.

Value in Joint Venture

Although the deal was not consummated, the idea of selling off operations units could represent a new approach for large banks that need to raise cash quickly, according to consultants.

"Many banks are looking at the value of the business itself," said William Storts, head of the banking practice at Andersen Consulting. "If a bank were to retain an equity stake in the business and it was successful, they would have a higher earning asset than if they kept it in house and they would have a stake in the value of the business itself."

Banks in New York have been discussing such joint ventures for check processing for several months. Some large banks have also sold off niche businesses to processing firms.

For example, several of the country's largest trust institutions have spun off their processing operations. Other large banks have contracts with outside firms to handle wholesale lockbox operations or portions of their credit card processing.

"The strategy of the outsourcing providers is to provide all back-office and operational services for banks," said Lawrence A. "Ladd" Willis, managing vice president of First Manhattan Consulting Group. "The next step in providing data-processing services is to move into operational services, such as check processing."

It is not clear whether Bank of New York would have retained a stake in the processing operations it sought to unload. The bank began its discussions with EDS and IBM in the fall, and tried to close the deal in time for the April release of its first-quarter earnings report.

The bank hoped the sale would help offset the hit to first-quarter earnings caused by a $343 million provision for loan losses, the sources said.

Observers speculate that the companies were not able to line up enough additional customers by the April deadline to guarantee a sufficient revenue stream.

"They may not have been willing to bet on futures," Mr. Storts said. "Maybe they couldn't find enough interested parties to generate enough margin."

A Beachhead in NYC

Sources familiar with the negotiations said IBM dropped out of the talks early on, and EDS become the sole bidder.

The company may have been looking for a beachhead processing venture in New York City. "EDS is interested in buying core processing. It's an easy way for them to get into the business," said a consultant familiar with the talks. The true question, according to this consultant: "Is EDS willing to pay what the business is worth?"

EDS, a unit of General Motors Corp., wound up offering to run the processing operations under a traditional multiyear outsourcing contract, for a fixed fee. The bank turned it down.

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