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The proposed merger of Bank of New York and Mellon Financial, announced in December, was greeted with fanfare as investors and analysts alike acclaimed the new group’s standing as the world’s biggest global custodian. The company, to be called Bank of New York Mellon, will have more than $16,600bn of assets under custody.
But there is more to the deal than just a bigger custody business for Ronald O’Hanley, who runs Mellon’s asset management arm and will be chief executive of the new asset management operation. “The obvious strategic rationale for the merger was the custody and asset servicing business – it may be the ultimate technology business within financial services,” he says. “But there are lots of other benefits, not least of which are in asset management.”
The merger, due to be finalised in the third quarter of this year, will create an asset management powerhouse with more than $1,100bn in assets. Both Mellon and BoNY are multi-boutique asset managers – Mellon includes 13 separate investment subsidiaries, each supported by shared selling and back office infrastructure, while BoNY has five auxiliary groups.
Asset management will be the single largest business within the company but will account for a smaller percentage of total revenue. Asset management represents roughly 57 per cent of Mellon’s revenues, and this will be 29 per cent in the new company.
Mr O’Hanley says this will not change how he approaches the business, and he is relieved to be part of a larger entity. “People’s memories are short, but 2002 was not a happy time to be an asset manager,” he says. “Having more diversification and having access to the cross-sell and the client base is a cost-effective way to run the business.”
The merger with BoNY provides three important cross-selling opportunities, he says. The first is in the custodial business. Mellon has 400 clients who use its custodial and asset management services, generating more than $1bn a year in revenue. BoNY has not been as successful embedding its custodial customers this way, mainly because it has lacked a substantial product line. So Mr O’Hanley says he plans to “extend those relationships”.
The second opportunity is in BoNY’s corporate trust business, which comprises bond issues representing $8,000bn in total debt outstanding. BoNY, which enjoys a two-thirds market share, wisely consolidated its business as the nature of debt changed, says Mr O’Hanley.
“Every debt instrument that goes out there now – every one of these private equity transactions you see, any kind of structured debt – needs a corporate trustee,” he says. “They’ve taken a business that used to be a sleepy bond clipping business and created something that’s growing at an incredible rate and has more growth ahead of it than behind it. The trend is toward securitisation and they’re going to benefit from that.”
Meanwhile, his asset management business – one of the world’s leading short duration managers – could benefit from those collateral agreements. “There’s an enormous amount of cash that gets generated by these businesses or has to be held as part of the indenture agreement.”
Mr O’Hanley says he plans to come up with more short duration products aimed at these corporate trust clients. “It’s a fixed cost business and once you’ve covered those costs, you can add one, 10, 50 new clients and the incremental margin is close to 100 per cent.”
The third cross-selling opportunity is in Pershing, the trading and account management operating system for investment advisers, which BoNY acquired in 2003. Mr O’Hanley notes that registered investment advisers are the fastest growing segment in retail distribution. “Right now it’s for clearing business, but you can think about bundling suites of investment products on there,” he says. “Maybe just the core products that every client needs to have, whether it’s an index product, or a large-cap or small-cap product.”
Mr O’Hanley plans to hold on to the distinct institutional brands, but the three mutual fund retail brands – Dreyfus in the US, Newton in the UK, and Mellon everywhere else – will all be unified under the Mellon brand name. “Supporting more than one retail brand is really hard to do,” he says. “It’s not like Procter and Gamble where we’re in things from dog food to hand soap. Everything we do is investment product. And for retail investors, investing in a single brand makes sense.”
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