New York has not vanished BNY Mellon Acquires PNC Administration Unit

New York

Bank of New York Mellon said Tuesday it was buying an administration business from PNC Financial Services, vaulting the bank into the top ranks of hedge fund administrative firms.

BNY Mellon is buying PNC Global Investment Servicing for $2.3 billion, the bank said in a statement. The deal includes the purchase of $1.6 billion in stock and repayment of PNC Global debt.

BNY expects to raise between $700 million and $800 million as part of the deal. The transaction is expected to close in the third quarter of the year.

The deal will add $855 billion in assets under administration to BNY’s coffers.

The acquisition will secure BNY in one of the top slots among the largest administrators for hedge funds and funds-of-funds. According to the Q2 2009 HFN Fund of Funds Administrator Survey, BNY had about $199 billion in hedge fund firms’ assets under administration, while PNC had about $77 billion as of June 30.

The new combination would leave only Citco Fund Services and State Street Alternative Investment Solutions in the same size category as BNY when it came to providing services to hedge funds.

Bank of New York pays full price for small gain

New York

By Rolfe Winkler

Bank of New York Mellon is growing – at a price. The giant trust bank on Tuesday agreed to buy PNC Financial Services’ back-office operations for $2.3 billion. That works out to 23 times annualized fourth-quarter 2009 earnings. That is a heady multiple for only a marginal boost in market share.

PNC’s shareholders seem to be getting the better end of the transaction. The sale of the PNC Global Investment Servicing (GIS) unit boosts its capital and should help it repay $7.6 billion of bailout money received from the government.

Thanks to the deal, PNC’s Tier 1 capital ratio rises to 6.7 percent from 6 percent. PNC probably needs to raise yet more equity to pay back its Troubled Asset Relief Program funds, but this is a good start.

The advantages for BNY Mellon shareholders look less certain. The bank says the acquisition complements multiple business lines. But Robert Kelly, the chief executive, seems to be coughing up too much cash for just a 4 percent gain in assets under administration. The GIS business has been lumpy. And even using last quarter’s earnings as the basis for analysis – the unit’s strongest quarter of 2009 – BNY Mellon is paying a chunky multiple.

The purchaser reckons it can squeeze out $120 million a year of cost cuts. Taxed and capitalized, those savings are worth around $720 million today. Take that off the purchase price, and BNY Mellon is still paying $1.6 billion for the GIS business – a price-to-earnings ratio of 16 times, which still looks a full price. It’s the same multiple that leading rival Northern Trust trades on, while BNY Mellon’s own shares trade at just 12 times this year’s estimated earnings.

So to sell the deal to shareholders, management is talking about between $200 million and $300 million of extra revenue based on integrating GIS into BNY Mellon. But such cross-selling opportunities often turn out to be elusive, and even BNY Mellon acknowledges they could take three to four years to transpire.

If Mr. Kelly and his crew can find a way to produce such revenue benefits, both sides eventually may be able to call the deal a success. But for now, PNC holders have more to cheer.