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.

New York Times (blog) Is PNC Deal a Winner for Bank of New York?

New York

Bank of New York Mellon is growing, but at a price, Breakingviews says. The the giant trust bank agreed Tuesday to buy the back-office operations of PNC Financial Services for $2.3 billion. That works out to 23 times annualized fourth-quarter 2009 earnings of the unit. That is a heady multiple for only a marginal increase in market share, the publication says.

PNC’s shareholders seem to be getting the better end of the transaction, Breakingviews argues. The sale of the unit, PNC Global Investment Servicing, raises PNC’s capital and is helping it repay $7.6 billion in bailout money.

As a result of the deal, PNC’s Tier 1 capital ratio rises to 6.7 percent, from 6 percent. PNC said Tuesday that it would also sell $3 billion in new stock and pay back its bailout funds, but it would have had to raise more without the BNY Mellon deal.

The advantages for B.N.Y. Mellon shareholders look less certain, according to Breakingviews. The bank says the acquisition complements multiple business lines. But Robert P. Kelly, the chief executive, seems to be spending too much cash for just a 4 percent gain in assets, the publication argues. PNC’s back-office business results have been uneven. And even using last quarter’s earnings as the basis for analysis — the unit’s strongest quarter in 2009 — B.N.Y. Mellon is paying a big multiple, Breakingviews suggests.

The purchaser believes that it can squeeze out $120 million a year in costs. Taxed and capitalized, those savings are worth about $720 million today. Take that off the purchase price, and B.N.Y.

Mellon is still paying $1.6 billion for the PNC unit — a price-to-earnings ratio of 16 times, which still looks like a full price, according to Breakingviews. It’s the same multiple that Northern Trust, a leading rival, trades on; BNY Mellon’s own shares trade at just 12 times this year’s estimated earnings.

To sell the deal to shareholders, management is talking about $200 million to $300 million of extra revenue based on integrating the unit into B.N.Y. Mellon. The company delivered on revenue promises in its acquisition of Mellon. But such cross-selling opportunities can be elusive, and B.N.Y. Mellon acknowledges that they could take three to four years to transpire.

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

Go to Article from Breakingviews via The New York Times »