In a ground-breaking transaction, Mellon Bank Corp. said Monday it will buy Dreyfus Corp., the nation's sixth-largest mutual fund company, for $1.85 billion in stock.
The deal, by far the largest bank acquisition of a mutual fund company, provides the most dramatic example yet of banks' efforts to reach beyond their traditional lines of business for new customers.
Analysts hailed the transaction as a bold strategic move that would continue Pittsburgh-based Mellon's transformation into a fee-based powerhouse.
But in the first year after the deal is completed, Mellon's earnings per share will be diluted by a hefty 9%, leading some to conclude the price was too rich. Investors were also concerned over a lack of details about how the two companies plan to marry their organizations. Mellon's stock fell by 7.6% on Monday.
Mellon and Dreyfus had been rumored to be near an agreement several weeks ago. Talks were put on hold for what Mellon chairman Frank V. Cahouet would describe Monday only as a "cooling-off period."
At a new conference in New York on Monday, he joined Dreyfus chairman Howard Stein to call the final pact a "milestone in the history of financial services."
It promises to create an organization with $3 billion o annual revenues - including $1.6 billion of the fee revenues so much prized by bankers.
Dreyfus is among the country's best known mutual fund companies. Its trademark lion has prowled Wall Street for years in television and print advertisements. Mellon, the nation's 23d-largest banking company, has $34.9 billion of assets. In recent years, the venerable bank has undergone a revival and transformation under vigorous new management.
Together, Mellon and Dreyfus will have $615 billion of funds under their administration and $215 billion of funds under management, putting them within striking distance of the mutual fund industry's leader, Fidelity Investments, which has $250 billion under management.
Dreyfus will continue operating from its New York headquarters, with the same management, but as a unit of Mellon. "In no way will we try to merge the two organizations," said Cahouet.
The companies said their back-office operations and some administrative and operational functions may be combined. But Stein said Dreyfus expects to shed few, if any employees, as a result of the dea.
Stein, 67, said he planned to stay with the new company "for as long as I can."
The transaction gives both companies access to a million more customers. Dreyfus has 900,000 account holders and Mellon has 1.1 million retail customers, they said.
Mellon sees the deal as helping to expand its scope as a player in the burgeoning 401(k) retirement market, which relies on mutual funds for investments.
Dreyfus' mutual funds will likely join the product lineup that Mellon sales representatives make available through the bank's 400 branches. The bank sells outside funds, as well as Mellon's own Laurel funds.
Dreyfus primarily sells no-load funds, while banks typically charge loads, or fees, as a way of paying brokers. That arrangement will be evaluated, official said, but no immediate changes are planned.
At the same time, Dreyfus will continue as a direct distributor of funds, and a supplier of funds to banks other than Mellon.
"I don't know how other people will react to this," said Joseph S. DiMartino, Dreyfus' president and chief operating officer. "But we don't think a large part of our customer base will be affected."
Meanwhile, company officials said Dreyfus and Mellon should be able tap into each other's management expertise.
Mellon will buy Dreyfus in an exchange of stock scheduled to be completed by the middle of next year. Under terms of the agreement, Dreyfus shareholders will receive 0.88017 Mellon shares for each of the 36.6 million Dreyfus shares outstanding.
Mellon's shares fell $4.375 on Monday to $53 in New York Stock Exchange trading. Dreyfus was up $1.875 to $46.375.
The bank was downgraded to "may sell" from ~neutral" by Nancy A. Bush of Brown Brothers Harriman & Co., who also cut her 1994 earnings estimate by $1, to $5.25 from $6.25.
"The transaction is expensive," said Bush. "Mellon is paying 18 1/2 times '93 earnings for Dreyfus and anticipating 9% earnings dilution in year one," she said.
"Mr. Cahouet is saying the deal may be accretive [to Mellon earnings] by the end of the second year, but that puts us into a mid-1996 time frame," she said.
Bush added that "there is a feeling that this deal is being done at the top of the [financial] markets. What will the effect of a market decline have on the projected revenues?"
Others were more sanguine on the outlook.
"More important than the financial implications is the changing business mix and what Mellon is transforming itself into," said Brent Erensel, a bank analyst at UBS Securities Inc.
"This is the second part of the Boston Co. transaction," he said, referring to the money management subsidiary that Mellon bought earlier this year from American Express Co.
"It is now more a mutual fund processing and money management company than any other bank I'm aware of, except for State Street [Boston Corp.]," he said. "The difference is that Mellon trades at seven times earnings while State Street trades at 14 times earnings."
Executives with both companies soft-pedaled the reasons for the initial termination of discussions.
On Nov. 11, Dreyfus said it had held, but terminated, preliminary discussions about a possible merger with another financial institution, which was thought to be Mellon.
On Monday, Both companies denied that price was the reason for the break-off. If anything, they hinted that certain cultural questions had to be grappled with.
"Change frightens all of us," DiMartino said Monday. "We wanted to give [Dreyfus employees] a feeling of continuity with this."
DiMartino said he spent the weekend talking to Dreyfus money managers and mutual fund board members, who must approve the transaction, and "each was happy about the combination."
They took to the transaction as a way to build assets and generally grow the Dreyfus business, DiMartino said.
Cahouet said he did not feel any potential cultural differences are insurmountable. The bank has digested Boston Co., and its financial services organization, Cahouet said. "We have learned how to overcome this wide range of different talent."
He declined to offer specific of how Mellon had acomplished this, saying only that "communication" and a "lack of rigidity" had helped smooth the way.
Gordon Matthews and Karen Talley ae reporters with the American Banker, a sister publication of The Bond Buyer.The Biggest Just Got BiggerMutual fund assets under management at banking companiesMellon(*) $76.8 billion Mellon's Fund EmpirePNC $18.8 billion Assets under managementBankAmerica $15.1 billion Laurel FundsNationsBank $11.5 billion (Mellon proprietary funds)Wells Fargo $ 8.1 billion $3.3 billion TCB Funds (Acquired with Boston Co.) $1.3 billion Dreyfus Funds (Acquisition pending) $72.2 billionAll data as of Sept. 30.(*) Inclues Dreyfus Source: Lipper Analytical Services