Furthering its bid to become a global asset manager, Mellon Bank Corp. said Friday that it plans to acquire a majority stake in a leading British investment firm, Newton Management Ltd.
The Pittsburgh banking company would acquire 75% of Newton, which manages $20.4 billion of assets, for about $207 million in cash and loan notes. Mellon said the deal, which is subject to regulatory approval on both sides of the Atlantic, is expected to close within two months.
The remaining 25% stake would stay in the hands of Newton management and staff for five years, when Mellon would have the option to increase its ownership, said Christopher "Kip" Condron, a vice chairman of Mellon and president of its mutual fund subsidiary, Dreyfus Corp.
The sellers are Royal Bank of Scotland, which owns one-third of the company, and Newton's management, which owns the balance.
With the deal, Mellon joins a parade of U.S. investment management companies that are pushing into Europe, drawn by business opportunities arising from privatization of government-run pension systems.
For instance, Houston-based Aim Management Group Inc. merged in the fall of 1996 with Invesco, a British mutual fund company, to form Amvescap, a $192 billion-asset investment manager. It has since acquired GT Global, a Luxembourg-based fund company.
And in December, Merrill Lynch & Co. bought Mercury Asset Management, the second-largest U.K. fund manager.
Europe's burgeoning investment business clearly represents an growth opportunity for U.S. firms, and "Newton will represent a good foot in the door for Mellon," said Diana MacKay, London-based European head for Lipper Analytical Services, Summit, N.J.
However, she warned, U.S. participants in the European investment market must be patient. Of $7 trillion in mutual fund assets worldwide, only $2 trillion lies outside the United States, according to Lipper.
"The biggest problem the U.S. players have is comparing asset growth here to what's happened in the States," Ms. MacKay said. The market has some way to go, she said, and U.S. participants can find themselves disappointed.
The Newton deal, one of several asset management transactions Mellon is pursuing both at home and abroad this year, underscores the banking company's intention to be a player on the international stage.
At a recent industry gathering in Vienna, Mellon chairman Frank V. Cahouet told American Banker that the company saw a need to expand abroad in selected areas, such as custody and asset management. "We can't ignore the fact that our clients are buying services around the world," Mr. Cahouet said.
Newton would add a component to Mellon's presence in Britain, where it already offers corporate banking, trust and custody, and fund accounting. Mellon has 1,000 employees in Europe, most of them based in London.
In other moves overseas, Mellon has formed alliances and joint ventures- some of which have involved minor equity stakes-in Chile, Brazil, Hong Kong, and Japan.
Key to its recent acquisition strategy is the desire for a global asset management presence, said Ronald P. O'Hanley, president of Dreyfus Institutional Investors, Mellon's institutional asset management arm. "We would describe Newton as the cornerstone of that effort," he said.
Mellon decided on a British asset manager because of that market's relative maturity in relation to rest of Europe, Mr. Condron said. Of Europe's fund business, he said, "It sort of reminds me of the money management business here in the States in the early to mid-'70s."
Mr. Condron said that he sees the evolution of Europe's investment markets developing in much the same way as in the U.S., with a movement from straight bank deposits to money market funds, bond funds, and ultimately the equity market.
Newton's product manufacturing capabilities could fit in with Mellon's other international alliances, Mr. O'Hanley said.
"Newton's got a terrific equity product that I would like to see distributed in Japan through our alliance with Bank of Tokyo Mitsubishi," he said.
Newton, which employs 85 people, will operate as a independent subsidiary of Dreyfus Institutional Investors, since $15 billion of the assets under management represent institutional assets.
The remainder of the money managed by the London-based company includes mutual funds and discretionary management for high-net-worth clients, as well as offshore funds based in Jersey in the Channel Islands.
Mr. Condron said Newton's value-oriented investment strategy would round out Mellon's asset management styles, which include a growth, indexed, and blended approach. Those four styles, coupled with large-cap, small-cap, mid-cap, and global approaches, give Mellon a fund manufacturing capability that sets it apart from its competition in the U.S., he said.
But offering more choice can prove cumbersome, warned Peter Marshall, an investment management consultant with Ernst & Young in New York. "It can be very difficult to maintain multiple styles within a organization" Mr. Marshall said. "Money management plans are notoriously hard to pull together."
Mellon's Mr. Condron is not dissuaded. He said this deal is unlikely to be its last in investment management.
"We're always looking to enhance our positions. We're constantly looking for opportunities," he said.