PNC Bank Corp. announced Tuesday that it would buy First Data Investor Services Group for $1.1 billion in cash.
The deal for the subsidiary of Atlanta-based First Data Corp. would significantly expand the $75.6 billion-asset Pittsburgh banking company's behind-the-scenes role as a service provider to mutual fund companies. The move reflects PNC's push for growth in fee-generating businesses.
PNC's investment servicing arm, PFPC Worldwide, would jump two notches to become the No. 1 full-service transfer agent-a job that entails maintaining the share ownership books and records of a mutual fund. And it would strengthen its No. 2 position among fund accountants. The transaction is expected to close in the fourth quarter.
J. Richard Carnall, PFPC Worldwide's chairman and chief executive officer, predicted big growth for PFPC. "We expect to be producing revenues of a billion dollars or so in the next few years," he said. "That's a pretty awesome enterprise."
A spokesman said PFPC's revenues in 1998 totaled $191 million. First Data Investor Services Group's revenues could not be learned.
PNC has been on a drive to ease its reliance on spread income by bolstering fee income. The company, which derived 50% of its revenue from fee income in the second quarter, said the acquisition would help ratchet that figure up to 55% this year and 60% in 2000.
In an industry where fee income typically accounts for 35% to 40% of revenues, PNC is one of a handful of banking companies that stand out from the pack, analysts said.
State Street Corp. of Boston, Bank of New York, Mellon Bank Corp. of Pittsburgh, Northern Trust Corp. of Chicago, and Fleet Financial Group of Boston are others that derive more than 50% of their revenue from fees. "PNC is certainly right up there with them," said Christopher Bamman, an analyst with Advest Inc. of New York.
The deal is PNC's largest since its $3 billion acquisition of Midlantic Corp. of Edison, N.J., in 1995. Mr. Bamman termed the price of the First Data deal "reasonable."
Mr. Carnall, who would remain CEO of the merged unit, said the acquisition would "advance the ball" for PFPC by adding technological capabilities in areas such as Internet services for shareholder accounting.
PFPC provides accounting, administration, transfer agent services, and trust services to mutual funds, hedge funds, and offshore funds. First Data provides similar services but has no international presence, Mr. Carnall said.
Together, PFPC and First Data Investor Services provide fund accounting services for $287 billion of mutual fund assets, according to Dalbar Inc. of Boston. The combined unit would provide transfer agent services for 33 million shareholder accounts, 14 million of which are full-service clients.
The deal would gives PFPC entree to the retirement plan servicing business. First Data Investor Services supports 20,000 retirement plans with three million participants.
Though historically it has been difficult to generate good margins in the 401(k) record-keeping business, that is beginning to change, partly because of consolidation in the industry, Mr. Carnall said.
Having this capability also allows PFPC the opportunity to work with countries that are delving into pension reform, Mr. Carnall said.
The PNC spokesman said the bank may consider spinning off PFPC though retaining a majority stake, in order to boost shareholder value. It is doing this with BlackRock Inc., a New York investment management firm that PNC bought in 1995.
"It's certainly something they can do to increase shareholder value," said Mr. Bamman of Advest. He added, however, that PNC would probably wait until after the BlackRock IPO, disclosed in a May 11 regulatory filing, is complete.
Mr. Carnall did not say whether there would be an IPO for PFPC. However, he said, "companies like this tend to trade at much higher multiples than banks do, so it's an opportunity to maybe create some shareholder value."
The PNC spokesman said he expected minimal layoffs as a result of the First Data Investor Services deal.
PFPC has about 1,500 employees mostly in Wilmington, Del., outside Philadelphia, and in Dublin. First Data Investor Services has about 3,30 employees, he said.
James L. Fox, who was named president of First Data Investor Services Group in June, would become vice chairman of the combined fund servicing unit. He succeeded Jack P. Kutner, who would remain an adviser to First Data Corp., a spokeswoman said.
"At this point they have made no other decisions on the management," she said.
One observer said it makes sense for First Data to sell its mutual fund servicing line.
"It's a business of scale where you have to be completely focused," said Wayne Segal, who covers First Data for Credit Suisse First Boston.
He said First Data would have had to invest tremendous amounts of capital to continue to compete "and the money was probably better invested somewhere else."
The First Data spokeswoman said the company will continue to focus on its core businesses: electronic payments, electronic commerce, and transaction processing.
PFPC administered $82 billion of assets for bank-managed mutual funds as of Dec. 31, according to Lipper Inc. of Summit, N.J., and First Data Investor Services administered $58 billion of assets.
In a legal footnote to its announcement, PNC noted that the First Data unit's ability to retain and generate customers could fall short of expectations. Observers, however, said the expanded company will probably not have problems.
"I would think that the combined organization is much stronger than the group being acquired" and will be able to provide additional services to clients, said Burton J. Greenwald, a Philadelphia-based mutual fund consultant.