The stock market reacted warmly to the deals that Bank of New York Co. and Mellon Financial Corp. announced last week; shares of both companies rose smartly, despite a lack of Wall Street consensus on precisely what had transpired between them.
Officials at both companies carefully referred to the transaction as a merger, but many investment analysts and news media accounts rejected that as neutral posturing and tried to apply the familiar "acquirer" and "seller" labels. What was startling was the lack of consensus even on this point.
Beneath the jumbled calculus of who would take over whom is a discussion that goes well beyond semantics. Some analysts say the transaction's complex structure is intended to preserve Mellon's richer market premium and apply it to the combined company, which would be named Bank of New York Mellon Corp. The companies, meanwhile, say the structure is designed to make sure that they carry out a balanced merger.
"Both parties bring very high-quality business franchises to the table, so we wanted to look at the respective contribution of each franchise in terms of how we split key management roles, board roles, and the exchange ratio to make it as close to a true merger as we could," Bruce Van Saun, Bank of New York's chief financial officer, said in an interview.
The official line has been greeted with skepticism. Consolidation in the banking industry has spurred over 5,000 corporate combinations in the past 15 years, but calling the transactions "mergers" is, in the minds of many observers, a colossal misnomer.
"All mergers are effectively an acquisition of one company by the other, notwithstanding what the rhetoric is," said one banking lawyer who specializes in mergers and acquisitions, and who spoke on the condition of anonymity, because he thought being identified would be bad for business.
In banking, promises to merge rather than acquire are legion. Most of the industry's largest transactions were sold to investors under that premise. But in deal after deal, one company waxed and the other waned. NationsBank Corp. took BankAmerica Corp.'s name and then flat-out took over, as did Norwest Corp. when it acquired Wells Fargo & Co. Transactions joining Travelers Group with Citicorp, and Fleet Financial Group with BankBoston Corp., were ostensibly mergers of equals, but clear victors emerged in those cases, too.
Sometimes the putative seller seems to be the acquirer before long, as in the case of the recent transaction between Regions Financial Corp. and AmSouth Bancorp.
"You never know except by waiting for history to determine which was more equal than the other," said Ronald Janis, a bank M&A lawyer at Pitney Hardin LLP.
There are several components that third parties weigh in determining the acquirer in any given transaction. In Bank of New York's deal with Mellon, those components are exquisitely balanced - even down to the manner in which they communicated their choice of headquarters.
The decision to stay in New York was a logical one, given the companies' money- and markets-centered businesses, but the companies anticipated an emotional reaction from Pittsburgh residents, who over the years have earned a certain sensitivity to corporate defections.
Mellon drafted a separate announcement for the Pittsburgh press that highlighted steps the companies would take to make sure the city does not go neglected, including a promise to add, rather than subtract, employees there. The companies appointed a local advisory board, boosted the size of a charitable foundation, and vowed to hold at least two board meetings a year in Pittsburgh.
Observers who say Bank of New York is taking over Mellon perceive the choice of headquarters as one obvious manifestation of the tilting balance of power. They also point to the fact that Bank of New York's shareholders would end up with 63% of the combined company.
Most lawyers agree that the shareholder breakdown is largely irrelevant, and is usually only a reflection of each company's financial contribution to the combined company. In fact, the companies' estimates for next year show Bank of New York kicking in 64% of the earnings (and 70% of the equity).
Neither company has a large, influential investor. At neither company do executives and directors even approach a combined ownership of 5%.
In this case, "the shareholders don't matter," said the banking lawyer who requested anonymity. "What matters are the board and the management."
Here again, the components are carefully balanced. The board of the combined company, which would use the BNY Mellon brand, would have 18 members: 10 from Bank of New York and eight from Mellon. The Bank of New York preponderance is at least partially mitigated by the fact that in 18 months Thomas Renyi, currently Bank of New York's chairman and chief executive, would step down as the combined company's chairman - making way for Robert Kelly, who already has been named the CEO of the combined company.
The management breakdown also is intriguing. Of the 22 key senior management positions identified by the companies in a joint presentation, 14 would go to current Bank of New York executives, and the remaining eight would go to Mellon executives. Despite the raw numbers, the balance of power is more complicated. Not only would Mr. Kelly hold the top spot, but the heads of asset management and wealth management would come from Mellon. The third line of business, asset servicing, would feature co-heads, with one each from Mellon and Bank of New York.
To stock-focused investment analysts, the exchange ratio tells the story, and on that basis alone a number of analysts have concluded that Mellon is the acquirer.
"Bank of New York got the premium," said Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets. "How could someone acquire another company and get paid to do the acquisition?"
Though he acknowledged that the premium was slim, he cited it as the ultimate evidence of who is buying whom, since acquirers offer premiums to entice shareholders to give up control.
Mr. Van Saun said the premium is merely a consequence of using the companies' average trading prices over the past year, rather than their closing prices on the day before the transaction's was announced, as the reference point.
"Mellon has had some recent business momentum, and that was reflected in its current multiple," he said. Meanwhile, Bank of New York "had affected some very significant transactions that we were just in the process of closing," and "our view was that we were on the cusp of getting some of that revaluation."
In fact, some analysts suggested that it was precisely the premium multiple that dictated the deal's careful structure.
"They are swapping into the Mellon stock and giving some of that premium to Bank of New York shareholders in hopes of retaining that higher valuation," said Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners LP. "The Street was basically telling people that the Mellon culture under Bob Kelly's leadership was better, and they valued the stock at a higher multiple - and the Street wants the Mellon culture to pervade" the combined company.
Mr. Cassidy also noted that Bank of New York has traded at a discount to the trust banks.
"There was a reason for that," he said. "The new company has to make sure that its communication with shareholders follows the path of Bob Kelly's Mellon rather than the old Bank of New York."
Longtime banking observers said mergers of equals do not work, because the theoretically clean math of combining two companies is sullied considerably by human factors.
Companies attempting mergers of equals "don't begin with a single way of doing business, and you have to look at everything: Who's the best person for the job, and what's the best system to use," Mr. Janis said. "It causes immense headaches, and you often develop an adversarial relationship, particularly depending on how the leaders work together. People become uncertain of their future, and that brings out the worst in people."
The process "ends up inevitably in a power struggle, whether people want a power struggle or not," he said.
Hope springs eternal, however, and observers say the deal between Bank of New York and Mellon has as good a shot at being a true merger of any they have seen. Some of the power struggles that take place at traditional retail-oriented banking companies don't factor into this deal - there's unlikely to be a battle over credit cultures, for instance - and the companies' strengths tend to complement each other, rather than overlap, observers said.
"Mellon isn't in the corporate trust business, so to presume they could come in and somehow gut that - with who?" asked Robert Lee, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. "Mellon's not in the securities-clearing business. To presume that they will cut people out - well, what people are you going to put in?"
The dynamics that prevented Bank of New York from buying Mellon almost a decade ago are no longer in evidence, starting at the very top of Mellon's organization.
"Someone who has been at Mellon for 20 years and is cutting this deal is always going to lean to the Mellon side for all the answers, but Bob Kelly's only been there 10 months," Mr. Cassidy said. "I think he'll take a more objective view, because his loyalties aren't as deep. It could be a real win for the combined company."
Mr. Fitzgibbon is dubious, saying that he could not "think of a transaction in which one culture did not ultimately prevail," but he, too, said that Mr. Kelly's relatively short history at Mellon could pave the way for a more collaborative merger process.
Officials at both companies, not surprisingly, echo that optimism.
"I do think in this case that there is a very good chance of success of having these companies fit together and it being a true merger," Mr. Van Saun said. "There was a natural division of playing to each others' strengths when the major operating roles were delineated. I think everybody has accepted it."
Maybe so, but history suggests a challenge still lies ahead.
