Mellon Bank, by acquiring Boston Co., has received a quick injection of advanced technology and market clout, resulting in burgeoning revenues in pension fund management and global custody.
Mellon started moving its own customers to Boston Co.'s systems last month.
But already, the $36 billion-asset bank says it has increased the assets under management by the combined banks by a total of $30 billion since the announcement last September that Mellon would acquire Boston Co. for $1.45 billion from Shearson Lehman Brothers, a unit of the American Express Co.
In the Running
"We were both in the lower tiers" in size, said W. Keith Smith, vice chairman of Mellon and chief executive of the Boston Co. "Now we feel State Street is a good deal bigger than everyone else, but we're right there in the pack."
With the acquisition, Mellon's fee-based income went from 47% to 51 % of total revenue of about $2.5 billion, making it one the nation's biggest banks in terms of fee-based services.
Unlike many other banks going through back-office mergers, Mellon didn't spend much time worrying about how to cobble together systems.
Mellon decided to keep nearly all Boston Co.'s systems, but will add some of its own features. While Mellon has been rated well on in its domestic trust services, Boston Co. technology was viewed as superior, especially in international custody.
Boston Co.'s technology was one of the biggest reasons why Mellon wanted the trust company.
"If we had not acquired the Boston Co., we would have embarked on a major systems development program internally," said Mr. Smith.
At the same time, Mellon will continue to use both names, and will run the business from two locations, Boston and Pittsburgh.
But despite the move to Boston Co.'s systems, the unit's top executives are from Mellon. A Mellon executive, Mr. Smith was appointed to head the company, replacing Boston Co.'s John R. Laird. William J. Nutt, appointed by Mellon to remain president of Boston Co., unexpectedly resigned. But other executives from Boston Co. have remained.
Mellon expects cost savings of $90 million by the end of 1994. But layoffs will be less than originally anticipated, the bank says. Mellon announced in September 1992 it would lay off 200 administrative staff in Boston, but subsequently said it would hire 200 people to handle its increased business, so that in total fewer than 100 would be laid off.
Customers say they believe they will benefit from Mellon's acquisition. But they also see potential problems.
The cloud on the horizon is the mutual funds administration business. Before the acquisition Mellon was not in this business, but now it contributes $170 million in revenue.
Just after the merger, Mellon lost business totaling $31 billion in assets when four big funds owned by Provident, a subsidiary of PNC Bank Corp., decided to move their business from Boston Co. to PNC.
PNC and Mellon, which; operate in the same markets, had engaged in a fierce bidding war for Boston Co. that drove up the price of the company.
Then last month, Mellon filed suit against Primerica Inc., American Express, and their brokerage arms for allegedly violating Mellon's contract to buy Boston Co.
The suit alleges that Primerica's Smith Barney unit violated an agreement between Shearson and Mellon that neither Shearson nor its affiliates would compete with Boston Co. for custodial or administrative services to Shearson mutual funds. The suit alleges, among other things, that funds created by Smith Barney are "virtual clones" of Shearson funds serviced by Boston Co.
Mellon's shares, which had climbed from around $40 to $67 after the acquisition was announced, have fallen again, to $54, as a result of the lawsuit.
Fear of Rising Fees
Several customers expressed concern that over the long term, were Mellon to lose anticipated income in mutual fund administration, it could affect its fees for other services.
For now, however, Mellon' has been able to retain and build. business.
Mellon says it has won $40 billion in new assets in institutional trust and custody and $24 billion in institutional asset management, which consists largely of pension funds. Even. with the loss of $31 billion in mutual fund administration, the bank has increased assets under administration or management by about $30 billion.
The figures includes new allocations from existing clients and private placements. As of June, Mellon said it generates $250 million in revenue from institutional trust and custody, $150 million from institutional asset management, and $275 million from private banking.
One of the brightest spots is global custody. With Boston Co., Mellon bought a network of subcustodians and an accounting and reporting system that tracks holdings in multiple currencies - two areas where Mellon's network was sorely lacking.
Mellon's own international system was less automated. Customers said there were frequent, irritating problems, such as balance discrepancies that could not be cleared up for a long time.
Because of the merger, "we're cross-selling Mellon's corporate and institutional relationships into the global. custody network," said Alan Woods, executive vice president of Mellon Information Services. "Neither Boston Co. nor Mellon could do that before. Boston Co. didn't have the institutional clients, and Mellon didn't have the network."
The State of Idaho is moving $450 million from international accounts held by various custodians to Mellon, which already handles the remainder of its $2.6 billion fund. "Now that Mellon has the Boston Co., we'll bring it all in," said Robert Maynard, head of investment for Idaho.
"Boston has one of the best international systems around," said an assistant director of finance, of the Arizona State Retirement System. Mellon Bank is the primary custodian for the state's $11 billion asset retirement fund.
Mellon is keeping Boston Co.'s securities movement and control, institutional asset accounting, and personal trust systems, but will add to these some of its own features.
For the near term, Mellon is building a software bridge between the two systems. "We may not move an entire relationship from one system to the other." said Robert M. Boyles, executive vice president of global assets and institutional trust.
The conversion is expected to take place over the next two years. A total of 1,500 customers will be converted to Boston Co. systems, Mr. Boyles said.
Fifty offshore customers are all already on Boston Co. systems. Mellon had no offshore clients of its own.