Mellon Bank Corp.'s sagging stock has stirred to life after the unexpectedly favorable court ruling about its purchase of Boston Co., the money management concern.
The shares, which languished after Mellon filed the suit in mid-September, were ahead 50 cents to $57 in Thursday afternoon trading after a gain of $1 on Wednesday.
A federal district judge in Pittsburgh has enjoined Smith Barney Shearson Inc. from engaging for seven years in mutual fund activities that Mellon said were in violation of its purchase agreement.
Some Thought Price Too High
Mellon paid Shearson and American Express Co., its parent at that time, $1.45 billion for Boston Co. Some Wall Street analysts saw the price as too high and allegations in the bank's lawsuit heightened concerns.
Wednesday's ruling helped to allay some of those fears and buoyed the stock.
"This looks like a pretty comprehensive directive by the court," said Anthony Davis of Dean Witter Reynolds Inc. "It suggests Primerica doesn't have much room to come back and try to skirt this."
Primerica Inc. has since acquired Shearson from American Express and merged it with Smith Barney.
Mr. Davis, who recommends the stock raised his earnings estimate next year for Mellon to $6.65 from $6.50 following the ruling.
Threat to Fund Business
"We had thought there might be some erosion in Mellon's mutual fund processing business if assets were moved from Shearson to Smith Barney funds.
"That seems unlikely now. In fact the court ruling says that Mellon will get first crack at all new Smith Barney funds as well as the existing ones," he said.
Mellon had complained that, in violation of its purchase deal, Smith Barney Shearson merged some former Shearson funds into Smith Barney funds not serviced by Boston Co.
And the Pittsburgh bank had charged that some new funds being created were "virtual clones" of existing Shearson funds.
In his ruling, Judge Alan N. Bloch of the U.S. District Court for western Pennsylvania, barred Smith Barney from administering mutual funds resulting from a merger or reorganization involving existing Shearson and Smith Barney funds. He also prevented Smith Barney from administering funds "substantially similar" to existing Shearson funds.
And the judge went further, including any new funds sponsored or underwritten by Smith Barney after March 12, 1993.
The court directed Smith Barney to recommend, "subject to its fiduciary obligations," to each fund's directors that Boston Co. administer the funds.
It also told Smith Barney to reasonably ensure that Boston Co. get a chance to bid to provide administration to any mutual fund requesting a change of its administrator.
And Judge Bloch ordered Smith Barney to recommend to boards of directors of half these funds that a Mellon nominee be elected to these boards.
Mellon chairman Frank V. Cahouet hailed the ruling as a "major victory." A Smith Barney spokesman said the brokerage firm was "disappointed" and planned to appeal the decision.
And there were warnings that the dispute could be far from over.
The reference by the court to "fiduciary duty" may mean that pricing of administration services may well fall, "even though Mellon gets to keep it," cautioned Nancy A. Bush of Brown Brothers, Harriman & Co.
"Boston Co. and Shearson had a cozy, in-house pricing structure that was higher than the market," she said. "It simply won't be a profitable from here because there are too many competitive pressures in the business."
Moreover. Ms. Bush said, Primerica chairman and chief executive officer Sanford I. Weill should not be underestimated.
"While Sandy Weill may have lost this one, he will find a way, I am sure, to inflict as much aggravation as he possibly can in this matter," she said.
Ms. Bush, a critic of the price paid by Mellon for Boston Co., said she remains "very, very neutral" on the shares of the Pittsburgh bank.