Can Mellon Bank Corp. and Dreyfus Corp. live happily ever after?
That's the question competitors and investors are asking after the unprecedented engagement of a giant bank to a giant mutual fund company.
In some respects, the couple is a perfect fit. Straight off, Dreyfus brings more than 100 mutual funds to Mellon's distribution network of 400 branches. And there will be powerful cross-selling opportunities between Mellon's 1.1 million retail customers and Dreyfus' 900,000 investors.
But the potential for acrimony is equally obvious: How do two organizations with dramatically disparate staffs, compensation structures, and market strategies live together without a culture clash? Indeed, such fears by Dreyfus' management temporary rarily derailed merger discussions last month.
To pull off the deal, which was announced Monday, Mellon evidently had to agree to run Dreyfus as a separate company. And some experts think that is the only way to make such a marriage work.
Ronald Lynch, chairman of Lord, Abbett & Co., a large New York mutual fund company, believes any other approach would be far too jarring for both companies. "You don't take these types of organizations and try to push them together," he said.
The merger of banks and mutual fund companies is mostly uncharted territory. While First Union Corp. and Chase Manhattan Corp. have struck mutual fund deals, no one has tried anything like what Mellon is doing.
Dreyfus' $72.2 billion in assets under management dwarfs Mellon's $4.6 billion operation.
After the $1.8 billion acquisition is completed, Mellon will manage four times as many mutual fund assets as any other bank.
Mellon officials were careful to position the marriage as more like a strategic alliance than a traditional acquisition.
Dreyfus will retain its New York headquarters, its corporate name, and responsibility for its funds.
Maintaining a separate Dreyfus organization figures to pay dividends. While banks have become active players in the mutual fund arena, they still tend to be less entrepreneurial than fund companies.
"Banks are more regimented," said John Race, executive vice president of SunBank Capital Management, the mutual fund arm of SunTrust Banks.
Different Pay Scales
Differing compensation levels can also pose problems, Mr. Race said. Banks typically pay key people with a base salary supplemented by bonuses for meeting performance goals. But the sky can be the limit for top personnel at mutual fund companies.
There was enough concern about the melding of cultures for Dreyfus president Joseph DiMartino to spend last weekend calling Dreyfus fund managers and fund board counsel to gauge their support.
The deal would be scuttled either if fund managers chose to leave or if fund boards voted against using Dreyfus as adviser.
But Dreyfus associates apparently endorsed the wedding after being assured of relative autonomy and the potential for asset growth that Mellon's branch network brings.
Mellon has not yet revealed how it will deal with potential service overlaps between its own operations and those of Dreyfus and Boston Co., a large trust administrator acquired earlier this year.
The bank's challenge is to make its decisions "based on merit and not political considerations," said Avi Nachmany, analyst with Strategic Insight, New York.
Mellon must also come to terms with the fact that other banks may no longer be comfortable as institutional clients of Dreyfus, or as sellers of the company's mutual funds.
"It's difficult to envision a bank wanting, in effect, to put money in the pocket of a competitor," said one financial services executive, who asked not to be identified.
No Load' Issue
In fact, Dreyfus has apparently been turning off some bankers for the past year. The company stepped up direct advertising of no-load funds, while continuing to offer funds with loads, or fees, through banks.
"It makes it look like the bank is tacking the charge on," said Robin Moser, president of BB&T Investment Services, the brokerage arm of BB&T Financial Corp., Wilson, N.C.
For its part, Mellon is publicly putting much emphasis on the potential for increased sale of funds and retirement plans through its branches.
The bank targets retail customers for individual fund purchases and thousands of small and middle-market businesses for building 401(k) retirement programs with baskets of mutual funds.
Conversely, Dreyfus' 900,000 account holders serve as potential customers for Mellon credit cards, mortgages, and other retail products, the bank said.
The Mellon-Dreyfus deal is the latest stab by the industry to forge alliances with outside companies.
Notable disappointments include Sears and General Motors. which purchased banks a decade ago as a way of expanding their footing in financial services.
But times have changed, and Mellon's choice of a partner couldn't present better chances for success, said Thomas Johnson, chief retail banking executive at Barnett Banks Inc.
"A bank was not a natural extension of what GM or Sears does," he said. "Dreyfus is a tight fit."
If Mellon and Dreyfus do indeed live happily ever after, they will help put to rest stereotypes about stodgy banks, free-wheeling mutual fund companies, and their inability to coexist under the same corporate banner.
"This is a defining event," said Mr. Johnson. "Mellon now is like a bank of the future."