Mellon Bank Corp.'s blockbuster 1994 deal for Dreyfus Corp. has chilled the market for bank acquisitions of mutual fund companies, a prominent investment banker said.
A 10% drop in Mellon's stock price since the $1.85 billion deal, along with a continued backlash against the purchase from analysts, is likely to prevent bankers from making similar acquisitions, said Donald H. Putnam, principal of Putnam, Lovell & Thornton, San Francisco.
Mr. Putnam's remarks came during a panel discussion about consolidation trends in the mutual fund industry Wednesday at the Investment Company Institute's annual meeting here.
Analysts continue to carp at Mellon's chairman, Frank Cahouet, for diluting the Pittsburgh banking company's earnings by 8% through the acquisition of Dreyfus.
"American banks will have to have the kind of nerve Mellon had, but Mellon has not gotten the recognition it should," Mr. Putnam said."There has been a fire storm that has not abated since that acquisition. American banks will not be major players in significant transactions," he added.
What irks analysts so much, and creates concern among bankers, is thatmuch of what is acquired beyond assets under management is goodwill, comprising intangible assets that must be amortized over time, Mr. Putnam said.
Banks are passing on fund company acquisitions just as consolidation in the fund industry is picking up. Fund companies need to raise capital to pay their high distribution costs, explained panel member Milton R. Berlinski, an investment banker at Goldman, Sachs & Co.
With more than 7,000 mutual funds available - more than there are individual stocks - management fees and sales charges have taken a dive. Fund companies need to raise money for marketing and technology support services to distinguish themselves and to expand overseas, Mr. Berlinksi said.
Despite the impact of the Mellon-Dreyfus deal, banks are showing a willingness to make smaller acquisitions that don't offend shareholders, consultant Geoffrey Bobroff of East Greenwich, R.I., said later in an interview.
Putting together cultures of two fund companies is hard enough, but trying to merge a sales-driven, high-paying fund company with a staid, stodgy bank that covets loan officers over portfolio managers could be a Herculean task.
Debra Cope contributed to this report.