What a difference a year makes. Twelve months ago The Bank of New York (BNY) was hatching its ultimately unsuccessful plan to merge with Mellon Bank, the Pittsburgh-based financial institution. With Frank Cahouet, the chairman and CEO, due to retire at year-end, and loose ends still hanging from its acquisition of The Boston Company and Dreyfus, Mellon looked vulnerable. In contrast to many of its competitors in the custody business, it had failed to make much of an impact outside North America, and BNY’s approach was seen by many as both logical and inevitable.
But something else was happening 12 months ago. ABN AMRO, the Dutch bank, had been agonising over its future involvement in the securities services business. Although it was a top 10 global custodian, with assets of more than $500bn and a network covering over 70 countries, ABN AMRO was under pressure from the big American custodians and was finding it difficult to compete, even in its home market. The big Dutch institutional investors were asking for more than ABN AMRO could deliver, especially in terms of specialist investment administration and accounting services like portfolio valuations, performance measurement and risk analysis. Some, like ABP, were increasingly using foreign providers to satisfy these demands. ABN AMRO appeared to face a stark choice: invest in new technology and resources to come up with value-added services, or get out of the business.
There was, however, a third way. Once it had concluded its strategic review, ABN AMRO approached Mellon about the possibility of establishing an alliance. The match could hardly have been better. Mellon, with about $2 trn of assets under management and administration, has a strong North American client base and an impressive range of valued-added products, such as securities lending, compliance monitoring and fund accounting. ABN AMRO delivers local client servicing through 1,900 offices around the world, as well as having a strong European client list, with a quarter of its clients based outside the Netherlands. On the face of it, both have something to gain from the alliance, which was finally consummated in November last year.
Hardly had the dust settled on the deal than Mellon announced its intention to sell off a number of operations, including its mortgage business and credit card portfolio, to concentrate on its core activities. Within the space of a year, Mellon had transformed itself from a potential takeover target to a highly focused asset services group. The alliance with ABN AMRO would help to give it much-needed impetus in Europe, as Nadine Chakar, managing director of the joint venture, confirms: “This alliance satisfies the immediate need to bring new products to the market,” she says, “and gives us the global distribution channels we’ve been looking for.”
Mellon also recognised that it could no longer afford to service its own overseas clients primarily from the US. “As our clients become more multinational,” Chakar says, “they are looking for local service for their local operations. The alliance enables us to deliver that.” Chakar believes that this change will help to improve Mellon’s ranking in industry surveys, where it has traditionally fared badly. “I think you’ll see a significant improvement by next year,” she says.
The alliance, which suffers under the name of ABN AMRO Mellon Global Securities Services, will initially target a relatively small group of ABN AMRO’s clients which have expressed an interest in using Mellon’s value-added products. The migration plan currently covers about 90 clients with $80 bn of assets, although more may follow. Chakar claims that the alliance offers something that clients have been looking for: “What we’ve been hearing is that they want a blend of European service and American technology and expertise,” she maintains.
But it isn’t going to be plain sailing. Regardless of the deal with ABN AMRO, Mellon has a problem with name recognition and a credible franchise within Europe. In three key markets – the UK, Switzerland and Germany – it faces stiff competition from all the major players and the alliance won’t carry much weight. Even in the Netherlands, where the alliance would be expected to do well, there is not much love lost for ABN AMRO’s securities services business, and it will have to work very hard to rebuild its tarnished reputation.
In spite of this, Mellon is bullish about the prospects for the alliance. “Within three years we want to be the one of the top two custodians in Europe’s major markets,” Chakar says. She also contends that the alliance route, which has no formal regulatory or legal structure, was the best option. “With a merger,” she explains, “there are inevitably going to be redundancies which won’t be the case with the alliance.” Mellon knows all about the problems of assimilating new businesses after its acquisition of The Boston Company in 1994.
So far, the market seems slightly baffled by the deal. It isn’t yet clear precisely how the alliance is going to work and who will be responsible for what, and there is a suggestion from some quarters that it is largely a cosmetic exercise that will actually deliver very little of value to clients. But Mellon is making all the right noises and, in truth, this deal probably represents the best available alternative in the short term. Nobody should be surprised, however, if Mellon ultimately buys out the whole business once the alliance has hit its stride. In the long term, that would make most sense for both parties – and they probably already know that.