As Mellon Bank Corp. headed into court to halt Bank of New York Co.'s unwanted bid, its shareholders were buzzing Thursday about putting pressure on the company to accept the deal.
Almost 60% of Mellon's stock is held by institutional shareholders, many of whose investment policy committees were weighing whether to make their views known about Bank of New York's $24 billion offer Wednesday.
"It's something we're definitely talking about," said a portfolio manager at one of Mellon's 15 largest shareholders. "At this point we have to consider whether we want to approach their board and tell them our feelings."
Mellon sued Bank of New York in federal district court in Pittsburgh late Wednesday, the same day it received the unsolicited offer.
Mellon asserted the bid is illegal because Bank of New York used what it termed "misappropriated confidential information" to prepare the offer, and that the company bought shares of Mellon after seeing the nonpublic information. Analysts estimate that Bank of New York owned a 4% stake in Mellon at yearend.
Bank of New York said called the suit "groundless," and said the bank will continue to pursue a "friendly" merger.
But a merger cannot be friendly without the blessing of Mellon's board. Since Mellon has insisted it wants to remain independent, Bank of New York is probably counting on Mellon's big shareholders to pressure the board to reconsider.
Some big Mellon shareholders said they may urge Mellon's board to seek a higher price in exchange for a friendly deal.
"There is room for Bank of New York to increase its offer," said Scott Edgar, research director at SIFE Trust Fund, which owns both Mellon and Bank of New York stock. "It's a valid combination, there's no ignoring that."
If that doesn't work, pressure could come if big shareholders take their case public.
"They'll get a spokesman, a large investor, to come out and say do the deal or else," said Miles P.H. Seifert, chairman and chief investment officer of Gray, Seifert & Co., a unit of Legg Mason Inc. "They're going to have to make some kind of a deal."
Representatives at Mellon's three largest shareholders - Harris Associates, Barclays PLC, and T. Rowe Price Associates - have declined to step forward, at least for the time being.
Another voice that could emerge is that of Warburg Pincus, a large holder of common stock that became a stakeholder in preferred shares through a financial assistance package in the late 1980s.
As a tactic of its own to fend off Bank of New York, Mellon could make overtures to another institution, like its Pittsburgh rival, PNC Corp., or Summit Bancorp of Princeton, N.J., industry watchers said.
"If they don't make the overtures themselves, they may have no choice of who they are partnered with," suggested Linda Chase, managing consultant at Towers Perrin.
In the meantime, Mellon management took its fight with Bank of New York to the courts.
In a complaint filed with the U.S. District Court for Western Pennsylvania, Mellon alleges that Bank of New York received confidential information last November while the two companies were negotiating a possible merger-of-equals. Those negotiations fell apart Dec. 9, according to the complaint.
"BONY has represented to Mellon that it only intended to merge consensually and as equals and that it intended to use Mellon's confidential information ... not for any other purpose," Mellon said in its complaint.
Mellon is seeking an injunction preventing Bank of New York from continuing with its unsolicited bid - and to prevent Bank of New York from acquiring any additional Mellon stock.
Bank of New York chairman and chief executive Thomas A. Renyi told analysts Wednesday that the bank has bought Mellon stock, but would not say how much. Bank of New York has not notified the Securities and Exchange Commission of its position. Under SEC rules, investors who acquire over 5% of company's stock must disclose how much they own.
SBC Warburg Dillon Read bank analyst Anthony R. Davis estimates that Bank of New York had a 4% stake in Mellon as of yearend, or about 10 million shares. The estimate uses the figure of $609 million worth of "asset adjustments" that Bank of New York told analysts would be necessary to account for a Mellon acquisition as a pooling of interests.
For all its allegations, Mellon has not requested a date for its complaint to be heard.
That led some analysts to believe that Mellon hopes its lawsuit will scare off Bank of New York, which has said it doesn't plan to proceed unless Mellon agrees to sell on a friendly basis.
"They've filed the complaint, but they haven't pulled the trigger," said James Schutz, bank analyst at ABN Amro Inc.
In the meantime, the company can expect to questions from its shareholders about why it will not consider a bid, friendly or unfriendly, that offers a 28% premium over the stock's market value.
Mellon management "will be hard-pressed going to Fidelity at this point and saying, 'Hang on, we're still going to do wonderful things,'" Mr. Seifert said.
The days when investors had close relationships with management and backed them almost blindly are gone, he said. "Now, it's strictly a numbers game."