The decision by Bank of Boston Corp. and Barnett Banks to share the job of servicing $75 billion in mortgages could set a new standard for strategic alliances among banks, industry observers said.
The deal, unveiled Monday, appears to mark the first time that two unaffiliated banking companies have pooled their resources to form a large, profit-driven company.
"This is creative and unusual," said Barbara Smiley, an analyst with Tower Group, a Boston-based consulting firm. "It's not like an outsourcing deal, where one bank would open to all comers."
Over the years, many banks have formed loose alliances to handle such technology-intensive chores as check processing or data management. But the deal between Bank of Boston and Barnett is more like "a true partnership," because it would create a separately capitalized, stand-alone company owned by the banks and two venture capital firms, Ms. Smiley said.
Observers said the deal - which started to take shape in late December - has implications beyond the mortgage business.
"This has possibilities for any area where you have intensive back- office operations," said Melanie Fein, a partner at the law firm OF Arnold & Porter, Washington. For instance, she said, banks could combine the back- office chores in businesses like credit cards and student loans, which require a lot of administrative attention and technology support.
"This is where the future may lie for some people," said Sam Lyons, senior vice president at Great Western Bank. "Everyone is trying to figure out how to make themselves more efficient. We will see more of this because the technologies are quite expensive to handle alone," Mr. Lyons said.
Edward Furash, a Washington-based consultant to financial services firms, hailed the partnership as ground-breaking. But, he added, the two banking companies still have some tough decisions ahead of them.
For instance, Mr. Furash said, the operation will have to decide how to meld the two banks' approaches to servicing customers, reconcile differing price structures, and settle on how much business to accept.
Then there's the matter of organization. Right now, the partnership exists only on paper. The banks have yet to draw up a charter or select a board - or run the gauntlet of regulatory approvals.
In fact, the proposed venture is a twist on a previous plan unveiled Dec. 11 by Bank of Boston.
Under that arrangement, Bank of Boston teamed with two venture capital firms, Thomas H. Lee Co. and Madison Dearborn Partners, to create an independent mortgage company.
The venture came about shortly after Bank of Boston dropped out of the bidding for the $40 billion servicing portfolio of Prudential Home Mortgage Co. (Norwest Corp. sealed a deal to buy Prudential's servicing in late January.)
In announcing the partnership last December, Bank of Boston said the structure would enable it to raise capital needed to pursue acquisitions. The company was aiming to boost its mortgage portfolio to $100 billion.
The plan called for Bank of Boston to contribute its mortgage subsidiary, BancBoston Mortgage Corp., in exchange for a 45% equity stake and $146 million in cash. The partners would contribute a combined $100 million in cash for the remaining 55% stake.
People close to the matter said Barnett, through its investment banker, UBS Securities, approached Bank of Boston in late December about joining the venture.
The overture came as something of a surprise to Bank of Boston executives. They had compiled a "list of the usual suspects" that were known to be up for sale, and Barnett was not among the group, according to one of the negotiators.
Still, Barnett's interest was welcomed. "When we learned it was a possibility we were very happy to pursue it," said Joe K. Pickett, chairman of both BancBoston Mortgage and the new alliance.
One factor helping to ease consolidation concerns is that both mortgage units are headquartered and have servicing centers in Jacksonville, Fla..
Also, Thomas Lee Co. was familiar with Barnett, having been involved in the sale of subprime lender Equicredit to the bank. "We were very impressed with their capabilities," said Thomas Hagerty, managing director of Thomas Lee Co.
The executives are not saying what other mortgage banks expressed interest in teaming with BancBoston Mortgage. But they said several companies contacted them.
Negotiations with Barnett began on a January morning in the Boston office of Thomas Lee Co. Mr. Pickett, Mr. Hagerty, and Hinton Nobles, executive vice president of Barnett, were among those at the sessions.
Barnett was firm about being able to continue operating its own origination program as a way of directly serving customers, said one of the negotiators. The bank also wanted to leave the door open to cross-selling products through its mortgage offices.
In the end, the companies settled on one-third ownership for each of the banks, with Thomas H. Lee Co. and Madison Dearborn Partners owning the remaining third. The transaction is slated to close in the second quarter, pending regulatory approval. Financial terms were not disclosed.