For 17 years, PNC Bank Corp. has sown a reputation for expertise in the obscure business of providing back-office services to mutual fund companies and other investment managers.
Now, as the Pittsburgh banking company completes a $1.1 billion expansion of its PFPC Worldwide subsidiary, it is planning to reap the rewards of getting in early on the mutual fund boom by taking the unit public.
This week, PNC closed its purchase of First Data Investor Services, a move that is expected to triple its revenues from such low-profile but lucrative activities as transfer agency - that is, maintaining share ownership books and records for mutual fund companies - and fund accounting. First Data brought in $400 million of revenues last year, versus PFPC's $191 million.
The addition of First Data Investor Services will give PFPC greater heft and more comprehensive services, something that could make the operation more appealing to stock investors, said Walter E. Gregg, a PNC vice chairman. The combined company, with 5,000 employees, plans to make an additional 350 hires, he said.
PNC chairman Thomas O'Brien recently said he expects to spin off part of PFPC within a year. Mr. Gregg said the company has not yet firmed up the timetable, but "very much intends" to go that route. The plan comes hard on the heels of another PNC spinoff - in October, the $73 billion-asset banking company raised $126 million by selling a minority stake in BlackRock Inc., its asset-management subsidiary.
Demand for the mutual fund services offered by PFPC has swelled in the 17 years since PNC entered the business. In 1982, mutual funds held $297 billion in assets; today, $6.2 trillion is invested in funds. PFPC ranks among the top players in the business, administering $346 billion of fund assets. With the deal for First Data, it becomes the leader among transfer agents and the No. 2 fund accountant.
The operation helps PFPC offer a broader service to fund companies, by providing more strength in transfer agency capabilities, fund accounting, fund administration, and custody and securities lending, said PFPC chairman J. Richard Carnall. The acquisition also allows PFPC to service assets for retirement plans, he said.
Mr. Gregg said that in seeking to go public, PNC recognizes that servicing companies trade at higher multiples than banks, so the stock sale would give more of a Wall Street valuation to PFPC. "In cases where you have a company like, this you want to act to maximize value," Mr. Gregg said.
"PNC is transforming itself into a unique entity with a complementary mix of high-growth, nonbanking businesses," said Thomas D. McCandless, an equity analyst with CIBC World Markets, in a recent note to investors.
Scale is important in servicing assets, said W. Christopher Maxwell, principal with Maxwell Associates, Rockhall, Md.
Now it's up to the operation to be exacting in its services to mutual funds, Mr. Maxwell said. "They have to be accurate in their reporting, technologically sophisticated, and price-efficient to be successful."
Meanwhile, PNC has set some high goals for the business. Consolidated operations are expected to produce $717 million of revenues next year, $862 million in 2001, and $1.018 billion in 2002, Mr. Gregg said. Net income will be around $42 million next year, $76 million in 2001, and $106 million in 2002, he said.