Mellon to tap stock plan in acquisition.

Mellon Bank Corp. will use its dividend reinvestment plan to raise cash for its proposed acquisition of the Boston Co.

Dividend reinvestment plans have become popular capital-raising vehicles for banks, but have rarely been used in the acquisition arena.

"I don't remember anyone financing a sizable acquisition through a dividend reinvestment plan," said Lawrence Cohn of PaineWebber Inc.

Plan Raised $35 Miuion

The Pittsburgh company said last month that it would buy the Boston Co. from Shearson Lehman Brothers for $1.45 billion. The bank plans to raise $150 million in common equity in connection with the purchase.

Mellon raised $35 million in common equity between July I and Sept. 14, including a substantial portion through the dividend reinvestment plan, said Charles Johnston, Mellon's treasury division manager.

The reinvestment plan may be used for a good portion of the remaining $115 million in common equity, Mr. Johnston said.

"I can confirm that we will attempt to do a portion, and perhaps a sizable portion, of equity through a dividend reinvestment program," he said.

He added, though, that the bank had not made a "final decision" about using an underwritten public offering to raise common equity.

A Typical Use

Reinvestment plans allow shareholders to use cash dividend payments to buy common stock at a discount. It is rare for a well-capitalized bank like Mellon to draw on a reinvestment plan. The plans are typically used by weakly capitalized banks that want to avoid unwritten stock sales.

For instance, First Interstate Bancorp raised $238.7 million in common equity during the first half through its dividend reinvestment plan.

To be sure, common stock is just a small part of the acquisition financing. The lion's share, $815 million, will be financed by debt issuance. The remainder will come from the public sale of $150 million in perpetual preferred stock and private sales to Shearson of $115 million in common stock and $37 million in warrants.

Mellon's reinvestment plan allows dividends to be reinvested in common stock at a 3% discount to market price. Besides reinvesting dividends shareholders can buy additional shares at a discount.

There is little cost difference to Mellon between selling stock through a public offering and through a reinvestment plan at a 3% discount. The public offering could cost 2% to 4% of the amount of stock sold in underwriting fees, said analysts and investment bankers.

Mellon said the sale is not expected to have a major effect on its capital ratios. At June 30, its leverage capital ratio was 6.21%.

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