One on One with Gerard Cassidy, Bank Analyst at RBC Capital Markets
Monday, December 04, 2006
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SUSIE GHARIB: Lots of mergers in the news today, from banking to casinos to chipmakers, worth more than $25 billion. Topping the deals, the Bank of New York and Mellon Financial are teaming up in a stock swap valued at more than $16 billion. If approved, the newly formed Bank of New York Mellon Corporation will have over $16 trillion in assets under management. The firms expect to save $700 million a year and they will also cut about 4,000 jobs from the combined workforce. Joining us now to talk more about this bank merger, Gerard Cassidy, bank analyst at RBC Capital Markets. Hi, Gerard.
GERARD CASSIDY, BANK ANALYST, RBC CAPITAL MARKETS: Hi, Susie.
GHARIB: I know that you find that this deal is attractive. Tell us why.
CASSIDY: Well, we think this is very attractive for both shareholders and Bank of New York and Mellon because strategically it makes a lot of sense. These companies' business lines complement one another and we anticipate after the integration is completed, which will probably take at least two years, we think they'll be able to grow the business faster than they would have done if they remained independent.
GHARIB: Why now? Bank of New York had approached Mellon back in 1998 and Mellon turned them away. Why did they agree to do the deal now?
CASSIDY: In bank acquisitions and mergers, there are three key obstacles that need to be addressed. The first one is, who is going to run the combined company? Where are you going to headquarter the company and then what are you going to call it? Back when these two companies talked about eight years ago, these issues couldn't be addressed. However with Bob Kelly, the new CEO of Mellon and Tom Renyi, the CEO and chairman of Bank of New York, they were able to iron out those issues. As you know, Bob Kelly will be running the company as CEO. Tom Renyi is going to be running the integration and will retire in about 18 months. Headquarters will be here in New York and the company's name as you described is Bank of New York Mellon Corporation.
GHARIB: So tell me about some of the risks. There's always some down side to any one of these deals. What do you see as the risks here?
CASSIDY: You're absolutely right. There's always risks on mergers and acquisitions and this is a very large deal. So we think that the risk is on the integration side. Bob Kelly though comes from Wachovia Corporation and as you might recall, First Union and Wachovia merged some years back and he was instrumental in making that deal work and it's been very successful. So the risk here is integration. But we think it's somewhat limited because of the senior management team that's in place at both Mellon and Bank of New York.
GHARIB: Now Gerard, both stocks rose on the news today, both the acquiring company, Bank of New York as well as Mellon. What were you telling your clients about these stocks? Is it time to take profits or is there still room to make money?
CASSIDY: We think there's still room to make money. So we're advising our clients, the shareholders of these companies to hold to the stock. We think there's still upside over the long term. But for traders, for people that are dashing in and out of these stocks, they're fairly valued. They had a great move today, both of these companies deservedly so. We think now they're both fairly value based on our expectations for 2007. But if you are a long-term investor and you're looking out to 2008 and 2009 and if the earnings come through as we think they might from this consolidation, the stocks are on the cheap side and you could buy them for that reason.
GHARIB: I know that this merger is a specialized merger, but do you see still see it as signaling a wave of consolidation with other banks or financial service companies?
CASSIDY: We think so. There's an expression that we use that deals will beget more deals. And we anticipate that there will be more deals in the banking industry. Those these companies are considered banks, they're really asset processing companies. But we do think there's more deals coming for the banking industry. And we think it's going to be driven by the fact that earnings growth is beginning to slow for the banking industry. And as earning growth slows, buying a competitor is a nice way of growing your earnings because of the cost savings you can achieve on that acquisition so, yes, we do see more deals coming on the horizon.
GHARIB: And who might be the buyers and who might be the sellers?
CASSIDY: We think some of the buyers include Bank America. We also think that Morgan Chase, JP Morgan Chase could be an acquirer as well as Citigroup, possibly Wells Fargo. In terms of sellers, we think Valley National out of New Jersey, ticker VLY is a potential seller. We think that deal could go at $28 to $30 a share.
GHARIB: Gerard, do you own any of these stocks or does your firm have any banking relationship with any of the ones you mentioned?
CASSIDY: No. We don't own any of the stocks, nor do we have investment banking relationships.
GHARIB: All right, terrific. Thank you so much Gerard for coming on the program. Appreciate it.
CASSIDY: You're welcome, any time.
GHARIB: We've been speaking with Gerard Cassidy, bank analyst at RBC Capital Markets.
