For Frank V. Cahouet, chairman and chief executive of Mellon Bank Corp., the deal to acquire Dreyfus Corp. is just the latest step in a long and arduous plan to transform Mellon from a sleepy and troubled corporate lender to a fee-generating financial services gaint.
When the Dreyfus deal is completed, some 52% of Mellon's revenues will stem from fee-based services, up from 46.5%. Only five other large banks can boast of a higher percentage.
Analysts say Mellon's new revenue profile - enhanced considerably by its acquisition in May of Boston Co. - makes the bank more akin to information-processing and fiduciary-service providers like State Street Boston Corp. and Northern Trust Corp. than to its traditional regional banking brethen.
Few Loan Woes
Largely insulated from the vagaries of lending, these high-tech banking companies are often among Wall Street's darlings.
The Dreyfus deal "brings them closer to State Street than any other company we follow," said Brent Erensel, a bank analyst at UBS Securities Inc. "And State Street trades at a higher price-earnings ratio than any other bank we follow."
Shares of Mellon fell $4.375 on Monday as investors signaled fear that the $1.85 billion it agreed to pay for Dreyfus will dilute the value of its stock. But analysts said the long-term impact of the deal will be positive for Mellon, as Mr. Cahouet has weaned the bank from its reliance on income from high-risk commercial loans.
"Fee income is what Mellon seems to be good at," said Michael Plodwick, an analyst at C.J. Lawrence. "It was never fee-based businesses that got them into trouble. It was banking."
Indeed, when Mr. Cahouet took Mellon's reins in 1987, shaky loans to real estate developers in the Southwest and to lesser-developed countries led him to take a gargantuan loss provision of $1 billion, resulting in an $844 million loss for the year.
Like many of his bank CEO colleagues, Mr. Cahouet moved to revive his institution by cutting costs and shedding bad assets. In 1988, for example, he spun off $941 million of marked-down problem assets.
But Mr. Cahouet also acted to transform Mellon's business mix, boosting fee, retail, and middle-market lending revenues. The graduate of Harvard University and the University of Pennsylvania's Wharton School beefed up Mellon's branch network via acquisitions and began investing in its profitable trust unit. Cash management and information services, longtime bright spots for Mellon, were also emphasized.
In the Black
By 1989, Mellon returned to profitability. In September 1992, it further signaled its recovery - and its emphasis on fee-generating, securities-related businesses - when it agreed to pay $1.45 billion to buy the Boston Co. from American Express Co.'s Shearson Lehman Brothers. Mellon is believed to have outbid Chase Manhattan Corp. and PNC Financial Corp. for the Shearson unit.
The Boston Co. transaction gave the $36 billion-asset Mellon a total of $700 billion in trust assets under administration, including $150 billion under management. Its contribution to Mellon's fee income is already clear.
In the third quarter of this year, Mellon saw its fee income rise 18% over the previous three months to $334 million. Boston Co. contributed $105 million of the total during its first full quarter as a Mellon unit, including $92 million from trust and investment management fees.
For Mr. Cahouet, the Dreyfus deal represents "another important step in our ongoing evolution into a full-service financial services company with a bank as its core," he said at a news conference. "Mellon has, for many years, stressed a strategy that calls for diversity in revenue sources, lines of business, products, and geography."
Mellon now defines "service products" as one of its three core businesses, on a par with retail banking and wholesale banking. The category, which in 1992 reported net income of $171 million, includes trust and investment, cash management, information services, and mortgage banking.
Just last week, Mellon announced another investment in its service products area. On Friday, the bank said it would pay $29 million for an equity interest in Electronic Payment Services Inc., a powerful automated teller machine network.
A Fee Leader
Noninterest income as a percentage of total revenues, year to dateBankers Trust 71%State Street 70%J.P. Morgan 68%Northern Trust 60%First Chicago 55%Mellon 52%(*) (*) Reflecting Dreyfus acquisition;based on third-quarter revenues Sources: SNL Securities, mellon