Mellon Bank Corp. will use its dividend reinvestment plan to raise cash for its proposed acquisition of the Boston Co.

Dividend reinvestment plans have become popular capital-raising vehicles for banks, but have rarely been used in the acquisition arena.

"I don't remember anyone financing a sizable acquisition through a dividend reinvestment plan," said Lawrence Cohn of PaineWebber Inc.

Plan Raised $35 Miuion

The Pittsburgh company said last month that it would buy the Boston Co. from Shearson Lehman Brothers for $1.45 billion. The bank plans to raise $150 million in common equity in connection with the purchase.

Mellon raised $35 million in common equity between July I and Sept. 14, including a substantial portion through the dividend reinvestment plan, said Charles Johnston, Mellon's treasury division manager.

The reinvestment plan may be used for a good portion of the remaining $115 million in common equity, Mr. Johnston said.

"I can confirm that we will attempt to do a portion, and perhaps a sizable portion, of equity through a dividend reinvestment program," he said.

He added, though, that the bank had not made a "final decision" about using an underwritten public offering to raise common equity.

A Typical Use

Reinvestment plans allow shareholders to use cash dividend payments to buy common stock at a discount. It is rare for a well-capitalized bank like Mellon to draw on a reinvestment plan. The plans are typically used by weakly capitalized banks that want to avoid unwritten stock sales.

For instance, First Interstate Bancorp raised $238.7 million in common equity during the first half through its dividend reinvestment plan.

To be sure, common stock is just a small part of the acquisition financing. The lion's share, $815 million, will be financed by debt issuance. The remainder will come from the public sale of $150 million in perpetual preferred stock and private sales to Shearson of $115 million in common stock and $37 million in warrants.

Mellon's reinvestment plan allows dividends to be reinvested in common stock at a 3% discount to market price. Besides reinvesting dividends shareholders can buy additional shares at a discount.

There is little cost difference to Mellon between selling stock through a public offering and through a reinvestment plan at a 3% discount. The public offering could cost 2% to 4% of the amount of stock sold in underwriting fees, said analysts and investment bankers.

Mellon said the sale is not expected to have a major effect on its capital ratios. At June 30, its leverage capital ratio was 6.21%.

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