Mellon Bank Corp.'s planned purchase of Dreyfus Corp. has highlighted sharp divisions on Wall Street about the venerable Pittsburgh bank.

Supporters see its shares as a table-thumping bargain against other major banks that emphasize nonlending financial services, which is Mellon's goal.

Skeptics, meantime, are troubled by the cost to Mellon shareholders - first-year dilution of earnings per share is estimated at 9%. They also fear the bank's deal is based on overly optimistic expectations.

Mellon is paying $1.85 billion for Dreyfus, based on its stock price before the announcement.

Shares Edge Lower

Mellon's stock slipped a bit further on Tuesday, off 37.5 cents of $52.625, after losing 7.6% of its value in Monday's shellacking on news of the Dreyfus deal.

"With the recent dividend increase, Mellon is yielding 4.2% and the stock sells at 129% of book value, but its pro forma return on assets next year looks like 1.5%," said Anthony Davis of Dean Witter Reynolds Inc.

"So the question is, how many banks can you buy at under 130% of book with a prospective return on assets of 150 basis points? The answer is: not many," said Mr. Davis, who has retained his "buy" recommendation on Mellon.

"I don't like the dilution," he emphasized. "It's a big nut. And you can say that Mellon's shareholders paid $250 million for Dreyfus in just one day on Monday."

|Landmark Transaction'

"But I am little more tolerant in this kind of situation, where you have a landmark transaction that will change the course of the company's destiny," he said.

"Few franchises are available like Dreyfus, where you can acquire instant credibility and become the second-largest discretionary asset manager in the country," he said. Dreyfus is the nation's sixth-largest mutual fund company.

While retaining his "buy" rating, Mr. Davis did slice his 1994 earnings estimate for Mellon to $6 from $6.65. But he feels the stock price may reach $70 in 12 to 18 months.

Waiting for the Payback

But other analysts, including those who like Mellon's management and its business strategy, are even more troubled by the dilution factor.

"We're unhappy with the dilution they're taking. It's just that straightforward," said Lawrence W. Cohn of PaineWebber Inc.

"We had felt in recommending the company that we liked their rich mix of fee income and felt they deserved a premium multiple. They did a deal that improved the mix even further, but they are taking substantial dilution in the process," he said.

Mr. Cohn suspects the dilution will reach 11% next year, rather than 9%, and doubts the cost of the transaction can be earned back in two years. "It won't take forever, but it probably will take longer than" two years, he said.

Moreover, he said he is concerned about how Mellon is going to achieve the 11% return it has promised on $750 million of cash from Dreyfus."

"You're not going to get that without leveraging the capital, so you are forced to conclude they are going to buy something else," he said.

"The issue being faced," Mr. Cohn said, "is that Mellon has a business mix we like. On the other hand, this is a company that has diluted shareholders, not for the first time, and raised the possibility that it may not be the last time."

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