Alexandria, VA (August 3, 1998) --As we work our way toward making a decision, I wanted to address a couple of issues about which more than a couple Fools emailed me this weekend.
A few people asked why would we want to consider Mellon Bank (NYSE: MEL) when it's most likely going to be taken out by a larger bank. Here's the problem with that. Such a hypothesis presupposes that consolidation is inevitable and that Mellon cannot resist the forces of change in the industry. Poppycock, I think. Its largest profit generators aren't even banks in the traditional sense of the word. Large business and middle market lending can be a marginally profitable pursuit while consumer lending can see heavy swings in credit quality and profitability.
Its wholesale lines of business, carefully cultivated through a number of acquisitions and through internal growth, make for a very different set of valuation dynamics and risk/reward profiles. While Bank of New York (NYSE: BK) offered what I believe was full value for the company, there wasn't a takeover premium in the offering at $90 per share. Given the level of productivity at the company, a takeover premium of at least 15%, or $13 1/2 per share, would not be unwarranted for this company. For this reason, I don't see a lot of other companies even stepping up to the plate to make a fair offer for the company. It's not a no-brainer acquisition, and it's not something where some other bank just comes in and cuts overhead by 40% to achieve profit targets.
For some reason, the world believes there's an overwhelming imperative for any independent bank to be acquired. That may be true when you're a company that lives and dies by net interest income and deposit share, but it's less true for Mellon. Like a State Street Corp. (NYSE: STT), which specializes in asset management and securities administration, Mellon can resist unspectacular takeover offers that don't take into account the company's phenomenal internal rate of return on its investments. Interestingly, Bank of New York has made an offer for State Street in the past, as well, but to this point has been unsuccessful.
I personally don't see a problem with investing in the company given the merger and acquisition landscape today. Mellon's board looks as though it won't take any offers that cannot match its own excellent economics. And if there is a transaction, we would have to look pretty hard at what the combined company would look like. For instance, if State Street and Mellon were to get together, that wouldn't necessarily be the worst thing in the world for either group of shareholders.
I hadn't covered Mellon until July of this year, believing that Mellon would be taken out pretty soon, as well. However, I realized that is just not a foregone conclusion and that I should look at it to see what all the hubbub is about. I think a company like this is a lot more flexible than banking giant NationsBank (NYSE: NB) and offers more attractive overall economics than even reigning value creator Fifth/Third Bancorp (Nasdaq: FITB). If you look at other companies with similar lines of business, such as T. Rowe Price (Nasdaq: TROW) or DST Systems (NYSE: DST), there hasn't been some sort of overriding imperative to merge. If you have very good economics, you don't really need to sell yourself.
The other question I received was on the fact that Temper Enrollment Services doesn't handle Mellon's DRIP program. Shouldn't be a problem. ChaseMellon Shareholder Services takes care of that, and according to Moneypaper, the company charges no fees for investing or reinvesting of dividends. ChaseMellon's number is (800) 205-7699.
Tomorrow, Jeff will weigh in with some thinking on the finalists.
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