While some banking companies continue to hoard capital, Bank of New York Mellon Corp.'s top executive said expansion remains its top priority. But some analysts said its latest deal is clearly a defensive move to box out Northern Trust Corp. from becoming a top competitor in asset servicing.
BNY Mellon announced Tuesday a definitive agreement to buy PNC Financial Services Group Inc.'s Global Investment Servicing Inc. business unit for $2.31 billion. The unit provides custody, fund accounting, transfer agency and outsourcing services for asset managers and financial advisors.
During a conference call Tuesday, Robert P. Kelly, BNY Mellon's chairman and chief executive officer, described Global Investment Servicing as "the last scale franchise in the United States for custody servicing." He said that the business is "highly complimentary" to BNY Mellon's asset servicing, alternative investment management, and its Pershing custody services business.
Over the past five years, Kelly said Bank of New York Mellon has been wary about making large acquisitions. Though it will need to raise approximately $800 million in capital to finance part of the transaction and will force the company to forego dividends, he said the deal equips the company for future growth.
"We are clearly hearing from shareholders that their first love is to continue to build the business and we'd love to do that," Kelly said.
Nancy Bush of NAB Research LLC said that the deal is "clearly a defensive move." She said other custody banks, specifically Northern Trust [NTRS], "would like to have scale in fund accounting and" Global Investment Servicing "was the only vehicle of any size let to them."
Kelly admitted that fund servicing has been a "bit of a weakness" for Bank of New York Mellon. The acquisition, which is expected to close in the third quarter, will solidify BNY Mellon's position as the second largest provider of fund accounting, administration and transfer agency services to fund managers globally. Bush said that it continues to trail State Street Corp. [STT] by "many multiples."
She said BNY Mellon paid an "overwhelming" price because "there clearly has been situations where BNY Mellon didn't have the product set and lost business because of it."
BNY Mellon said the all-cash acquisition will be accretive in the first year. The deal would add $855 billion in assets under administration, including $460 billion in assets under custody, and doubling the number of funds serviced for accounting and administration.
Gerard Cassidy an analyst at Royal Bank of Canada's RBC Capital Markets said that BNY Mellon "didn't pay a Filene's Basement Price, but they didn't pay a Nieman Marcus price either."
He said BNY Mellon got a better deal than State Street did when it bought the securities servicing business from Intesa Sanpaolo, a Milan banking company, for $1.87 billion in cash in December.
Considering the fact that PNC has been eager to sell this business to repay a portion of the $7.6 billion it received from the Treasury Department's Troubled Asset Relief Program, Cassidy said he thinks BNY Mellon is being opportunistic.
"To me, this was not a defensive move by BNY Mellon," he said. "They have proven to be an opportunistic buyer of asset management and asset servicing businesses, similar to State Street and Northern Trust. These three companies are in the asset servicing business. They have proven that they like to compliment organic growth with acquisitions. All three will continue to compete for deals."
Kelly said the acquisition of Global Investment Servicing would not preclude BNY Mellon from considering other deals. The company is interested in international expansion, he said, specifically in Europe.
"This is the largest deal we have done since 2005 so a deal like this is a relative rarity," he said. "We are being careful to make sure we maintain strong capital ratios and maintain our flexibility."
Based in Wilmington, Del. with offices nationally and across Europe, Global Investment Servicing has approximately 4,500 employees. Its current chief executive officer, Stephen M. Wynne, would remain in that role when the deal is completed.
Cassidy said he expects more deals will follow in the next two years. "Custody banks are back in their groove," he said.