Mellon Bank Corp. is losing a pair of back-office processing contracts for a $46 billion mutual fund complex operated by a unit of Travelers Inc.
The developments mark the end of the Pittsburgh banking company's stint as an administrator of other companies' mutual funds.
They also represent a blow to the mutual fund segment of Mellon's securities custody business, and an ironic end to what had been a closely watched legal battle.
The contracts that are being ended are for so-called administration and custody work for the Smith Barney Shearson Funds, which Travelers' Smith Barney Inc. unit acquired last year along with the retail and asset management business of Shearson Lehman Brothers Inc.
Stephen Treadway, executive vice president of Smith Barney's mutual fund operations, said the New York-based broker-dealer is phasing Mellon out as part of a plan to consolidate the Shearson funds with the family of funds Smith Barney had before the acquisition. The combination will create a $56 billion fund complex.
He said both families will use the same mix of back-office services that Smith Barney uses for its original family, namely inhouse administration, and PNC Bank Corp. -- one of Mellon's top rivals -- for custody. The transition is to be completed over the next 10 to 20 months.
As recently as late last year, Mellon had thrown up a roadblock to this type of streamlining, suing to keep Smith Barney from removing fund assets from the administration contract it has with Mellon's Boston Co. unit.
At the time, the maintenance of this administration contract was seen as important for justifying the $1.45 billion Mellon had paid to buy Boston Co. in May of last year.
Because of the suit, Mellon and Smith Barney agreed early this year to share administrative work for the Shearson Funds until the year 2000.
But shortly after the agreement, Mellon won regulatory approval for its purchase of mutual fund giant Dreyfus Corp.
Boston Co. spokesman Jonathan Hubbard said that after Mellon knew it would be able to complete the acquisition, it realized it needed to get out of the business of administering other companies' mutual funds.
The reason? Fund mangers are loath to tap a large rival to handle their administration work, Mr. Hubbard said.
"Third-party administration has become strategically less important and arguably more difficult to market" since Mellon acquired Dreyfus, he added.
As a result, Mellon decided to leave a business that was contributing close to 5% of its total revenues in 1993.
The first step on that front was taken in March, when Mellon agreed to sell all of its third-party administration business -- except the Shearson Funds contract -- to a unit of First Data Corp., Hackensack, N.J.
Mellon and Smith Barney agreed on Oct. 7 to unwind their administration contract. Mr. Hubbard said that "most, if not all" of the more than 200 employees handling the Shearson administration work in Boston will be moved to other jobs in Mellon.
Mr. Hubbard said Mellon remains committed to mutual fund custody, even though the Shearson Funds represent nearly half of its fund custody assets, which in turn, are nearly a sixth of the company's total custody and administration assets.
No employees are expected to be displaced in the custody area. Mellon spokeswoman Margaret Cohen said the ending of the administration and custody contracts will not have a material impact on Mellon's earnings.
Mellon's Tangled Dealings with the Shearson Funds
May 1993
Mellon acquires Boston Co., administrator and custodian of Shearson Funds.
September 1993
Mellon sues Smith Barney, which earlier in the year had acquired Shearson's investment business, for breach of contract. The bank claimed Smith Barney was improperly removing Shearson Fund assets from Mellon's administration.
January
Mellon and Smith Barney settle suit; agree to jointly administer Shearson Funds until year 2000.
Oct. 7
Agreement amended. Mellon is to stop administering and serving as custodian for Shearson Funds within two years.
Source: Company reports
