Mellon Financial Corp.’s deal to buy a Scottish equity firm could be the first of many for large U.S. trust banks looking abroad for acquisitions to expand their asset management businesses, analysts say.
The Pittsburgh company said Wednesday that it would buy Walter Scott & Partners Ltd., an Edinburgh equity investment firm with about $27 billion under management.
Mellon said the cash-and-stock deal, which it expects to close by the end of the third quarter, would increase its assets under management by 3%, to $880 billion. It did not give a price, but analysts said it would be $400 million to $500 million, not a stretch by any measure for Mellon.
Mark T. Fitzgibbon, an analyst with Sandler O’Neill & Partners LP, reinforced the view that Robert P. Kelly, Mellon’s chairman, wants to acquire.
“Bob Kelly is a buyer, not a seller,” Mr. Fitzgibbon said. “I think we will see more of these small to midsize acquisitions from Mellon that the company will use to enhance its product capabilities and its distribution.”
Ronald P. O’Hanley, Mellon’s vice chairman and the president of Mellon Asset Management, said Wednesday in an interview that the company already has developed a strong business outside the United States and will make only deals that offer new investment capabilities or help increase distribution.
“We’ll do more deals, but I emphasize that we don’t need to do acquisition and we aren’t forced to make acquisitions,” Mr. O’Hanley said. “We are finding plenty of growth opportunities through organic means.”
Analysts said the deal is Mellon’s 13th for a boutique asset manager, its fifth outside the United States since 2000, and its second in Europe in the past year. In September, Mellon announced plans to form an asset management joint venture with the German financial company WestLB AG.
Mellon and other large banking companies, such as Bank of New York Co., State Street Corp., and Northern Trust Corp., are looking to acquire outside the United States, analysts said.
“This peer group of trust banks have identified non-U.S. asset management as the fastest-growing business area,” said Gerard Cassidy, an analyst with Royal Bank of Canada’s RBC Capital Markets. “The asset management business has become more global over the past five years, and Mellon and these other banks want to take advantage of that.
“Europe is particularly attractive, because it is a fragmented market where, because of this fragmentation, players don’t have the economies of scale,” Mr. Cassidy said. “This has enabled the U.S. companies to generate a fair number of deals.”
Thomas McCrohan, an analyst with Janney Montgomery Scott LLC, said Bank of New York has been hinting for the past several months that it plans to make a deal.
“I think we can expect to see more deals overseas from Bank of New York, Mellon, and Northern Trust, but State Street seems content with indexing and the ETF stuff that they are doing,” he said.
Kenneth M. Usdin, an analyst with Banc of America Securities, agreed that cross-border acquisitions are a “high area of focus” for Mellon and other asset managers”
“Asset management is an industry that continues to consolidate,” he said. “I think other U.S. asset managers, beyond just the bank asset managers, could look abroad as well.”
Mr. O’Hanley said he has known the Scottish firm’s founder and chairman, Walter Scott, for several years and began discussing an acquisition with him in the second half of last year. He said he wants to use the Scottish firm, which specializes in global and international strategies, to develop new business domestically and internationally.
“I can see a real opportunity to take Walter Scott and have it subadvise a Dreyfus mutual fund or have Walter Scott run a global equity strategy for our private wealth management business,” Mr. O’Hanley said. “I think it is attractive to U.S. investors who are looking to diversify their portfolio.”
In the past 10 years Mellon’s global/international assets under management have grown from $2 billion to more than $100 billion, he said.
Walter Scott & Partners, which has about 60 employees, would become part of Mellon Asset Management but would maintain its brand, Mr. O’Hanley. Mr. Scott would remain the Scottish firm’s chairman.
