Editor's note: Before its merger with Mellon Financial, the Bank of New York pulled off a complex asset swap with J.P. Morgan Chase. To read CFO.com's exclusive interview with Bruce Van Saun about that deal, click here.
From a deals standpoint, last year could not have been any busier for Bruce Van Saun. For starters, there was the Bank of New York Co.'s acquisition of Urdang Capital Management, a real estate investment manager. Then, the 49-year-old vice chairman and CFO oversaw an asset swap with JP Morgan Chase, a complicated deal that exchanged BNY's 338 retail branches for JP Morgan Chase's global corporate trust business. Next, Van Saun helped the bank and two other firms form a new trade execution and order management company, BNY ConvergeEx Group. Finally, in December came news of the crowning deal: a blockbuster $16.5 billion merger with onetime rival Mellon Financial Corp., which will create the world's largest securities servicing and asset management firm, Bank of New York Mellon Corp. Van Saun, who will be CFO of the new bank, sees blue skies ahead for the business — and plenty of work to keep him busy in 2007.
How did the Mellon deal come about?
Mellon was rumored to be interested in acquiring MFS, a mutual fund company in Boston. That gave rise to the notion that Tom Renyi, our CEO, should put a call in to Bob Kelly, the CEO at Mellon — to say that before you get too wedded to the MFS opportunity, let's talk about doing something that's truly transformational.
It was always our view that consolidation in our space, the trust and custody banking segment, was inevitable. It's good to be the first mover and try to lead that effort, as opposed to being a follower.
Tom Renyi had tried to buy Mellon before.
Yes, we made a couple of attempts back in the 1990s. There was a different management team at Mellon [at that time]. In the years since, both the Bank of New York and Mellon had done a great deal to transform their business mixes, in terms of divestitures and acquisitions. So the merger made a lot of sense at a strategic level.
From start to finish, from when Tom made the initial call to when we announced the transaction, was about eight weeks.
This big merger, which is scheduled to close in July, seems much simpler than the asset swap with JP Morgan Chase.
You're right. It wasn't nearly as complex from a financial standpoint. We spent the better part of a year on the asset swap. That transaction was more complicated because it involved businesses that were embedded inside our respective organizations. These were not stand-alone entities. There were significant balance-sheet implications for both companies, as we examined how to take one business out and put another one back in. The modeling, the transition services arrangements between the two companies, and various operational issues were very difficult to analyze and then negotiate.
What strengths do Mellon and the Bank of New York bring to the merger?
On the Mellon side, asset management and wealth management are the big earnings contributors. They have a very strong but more niche-focused asset-servicing business centered around corporate pensions, foundations, and endowments.
The Bank of New York has predominantly an asset-servicing business profile, and a smaller yet very profitable asset-management component. In addition to being in the custody business that Mellon is in, we do asset servicing for bigger asset managers and financial institutions. We're also in the issuer-services business, so we have a very big ADR [American Depositary Receipt] business and corporate trust business. We're in the clearing business; we own Pershing, which is number one in clearing. We're in the government clearance business, where we're also number one.
When you put the companies together, there's a very well diversified business mix. Asset management is about 30 percent of the operating profit, asset services is roughly 25 percent, issuer services is around 25 percent. Clearing and treasury services are the balance, about 20 percent. Also, given that there are overlaps in some of these businesses, there are some meaningful expense synergies.
How long will it take to integrate the two companies?
We have a two-and-a-half-year time frame to phase in the synergies, post-closing. The biggest challenges will be around some of the technology integration. We have to choose wisely among the systems platforms, and make sure we have well-thought-out migrations from current systems to the new systems. We both have significant experience in acquisitions and systems migrations.
Based on your growth projections, it looks like the company could achieve a market cap of around $80 billion in five years. What's going to drive that growth?
In our model, what we were doing was basically growing the earnings within the goalposts of what we've set out as earnings objectives, which is 10 to 15 percent per annum. Then we'll have the added tailwind for the first three years of pulling through $700 million in synergies.
There is also some upside to those numbers, from two aspects. One, we didn't factor in any net revenue synergies. We basically assumed that we'd have a little revenue attrition, and we'd have enough revenue synergy to offset that. But quite honestly, if that were the case, we'd be highly disappointed. Clearly, there are opportunities to generate a lot of cross-selling revenue, which should handily exceed any revenue attrition that we would suffer.
The other possible upside is to get a P/E-multiple revaluation. At this point we just use the blended multiples. But given the size of this company and the growth dynamic at play, if we execute well and deliver consistent performance, I think we have a chance to get revalued.
Going forward, how do you feel about the merger?
I feel great. It's something that makes all the sense in the world, and it sets this company on a path to excel for decades. I'm steeling myself for a lot of hard work in the months ahead. But if we finally get this company to the other side of the river, it'll be a great feeling of satisfaction.