Bank of New York Corp.'s bid to buy Mellon Bank Corp. is losing ground in the arbitrage and hedge fund community, market experts said Wednesday.

The loss of support from these groups means fewer aggressive shareholders to pressure Mellon's board into selling to its unwanted suitor.

Arbitragers-investors who play the market opportunistically-have lost interest in the deal because "there is too much uncertainty," said bank analyst Lawrence W. Cohn of Livingston, N.J.-based Ryan Beck & Co. "They do not want to get involved."

Arbitragers typically short-sell the stock of a company making an acquisition and pile into the stock of its target in hopes of profiting from the premium being paid. But given the uncertainty of this deal, many may be turning their attention to other merger deals, market sources said.

"This is a failed bear hug," said one arbitrager, who asked not to be identified. "No arb is really going to take a position unless Bank of New York comes out and says that they are going to fight to the bitter end."

This uncertainty may have been a factor in a sharp decline in Mellon's share price. During Wednesday trading, Mellon's shares fell $2, to $72.875, on a day when most bank stocks were up. On April 22, when Bank of New York made public its $90-per-share offer, Mellon's shares surged to $78, but they have fallen back since.

If Bank of New York's bid had been a hostile offer instead of a "friendly" bid, arbitragers and hedge fund portfolio managers would have bid the price of Mellon shares closer to the $90 offer.

These new shareholders might have put pressure on Mellon's board to accept the offer. Now the deal depends on support from long-term shareholders-some of whom have questioned Mellon management's refusal to consider the offer.

Arbitragers said that there is little that Bank of New York can do to lure them into Mellon's shares.

If Bank of New York suddenly reversed its position and said, "We want Mellon Bank, no matter what," said another arbitrager, who also spoke on condition of anonymity, "that could possibly interest some arbitragers."

But such a tactical change, he said, would "say something about Bank of New York's credibility." It would raise the question "Can we trust them?" this arbitrager said.

Hedge fund managers find the stalemate between the two banks frustrating. When hedge fund manager Dale F. Jacobs of Financial Investors Inc. heard that Mellon had rejected Bank of New York's offer, he sold his position immediately.

"There are compelling reasons for this deal to happen," said Mr. Jacobs. "And I still haven't heard a reason why Mellon has said 'no.' Management issues do not make sense to me; value issues do."

A hostile bid for Mellon is not what the hedge fund community is looking for, added Mr. Jacobs. "Most investors know that hostile deals between banks tend not to work."

Nevertheless, not all in the market believe that the possibility of a deal between the two companies "is dead in the water."

Activist shareholder Guy Wyser-Pratte, who owns 100,000 shares of Mellon, acknowledged Wednesday that "the market reflects uncertainty," but he said a "shareholder body is coalescing which could put sufficient pressure on the board."

The bottom line is that "Bank of New York could do a tremendous amount with the assets of Mellon," said Mr. Wyser-Pratte. "The Mellon people should be grown-up enough to overlook the parochial issues," such as management succession.

Analysts pointed out that the spread between the stock prices of the two companies has narrowed to 10% from 13% this week, suggesting that Mr. Wyser-Pratte is not alone in believing the deal is likely.

The potential of the two companies merging is still substantial, said Mr. Cohn of Ryan Beck. "The market underestimates how long the Bank of New York will keep this up," said Mr. Cohn. Bank of New York's hostile bid for Irving Trust went on for years, he noted.

Mellon Bank is also under considerable pressure to explain to customers and shareholders why it can remain independent, he said. "Bank of New York," Mr. Cohn said, "can go to customers and say, 'You might as well come with us now, because you are going to wind up with us anyway.'"

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