Bank-Mutual Fund Mergers: What You Need to Know Q
The $1.7-billion merger of Mellon Bank Corp. and mutual fund giant Dreyfus Corp. raises a host of questions for depositors and investors.
How can consumers keep clear, for instance, the distinctions between a bank’s money market account and the bank mutual fund’s money market account? Which products are FDIC insured and which are not? Will your bank go out and buy a mutual fund company--or will your mutual fund company be purchased by a bank? And, when this happens, is fund performance or cost affected?
Here are some of the answers:
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Q: How does the acquisition affect Dreyfus and Mellon customers?
A: It will have little immediate effect, but it could have a noticeable impact in the long run, because Mellon and Dreyfus are expected to cross-market their products.
For instance, if you have a Dreyfus mutual fund, expect to get pitched for a Mellon Bank credit card, mortgage or personal line of credit. If you have a Mellon certificate of deposit, you’re likely to get solicitations for Dreyfus mutual funds.
Ultimately, the companies could merge some complementary operations, and they may have a single toll-free number so customers can check on their Mellon account balances and get information about Dreyfus mutual funds at the same time.
When and how such details will work out is not yet clear, a Mellon spokesman said.
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Q: Will Dreyfus mutual funds be sold in Mellon branches?
A: Yes, although there are no branches in California.
Q: I bought my Dreyfus mutual funds through another bank. (Dreyfus funds are sold by a variety of banks, including New York-based Citibank, First Republic in Texas and Wells Fargo in California.) Will my bank continue to offer Dreyfus funds?
A: That’s unclear. Dreyfus says it values its bank customers and wants to maintain those relationships, but many of those other banks compete with Mellon for credit card and mortgage business, for example. If Dreyfus is successful in cross-marketing Mellon products to customers who bought their funds through competing banks, the competing banks may abandon Dreyfus funds.
Several banks said Monday that it was too early to say whether they would continue to sell Dreyfus funds.
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Q: How will I get information about my Dreyfus account if my bank stops providing it?
A: You’ll still be able to call Dreyfus’ toll-free number or go into a Dreyfus customer service center. Dreyfus has about a dozen of these walk-in offices--in Los Angeles, Beverly Hills, San Francisco and other cities.
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Q: I don’t deal with either Dreyfus or Mellon, but my bank does sell mutual funds, and I’m constantly confused about what I’m getting. What’s the difference between the money market fund and the money market account?
A: The main difference is federal deposit insurance. A money market account offered by a bank is a savings account backed by assets of the bank and, if that fails, by the assets of the federal government.
When you buy shares in a money market mutual fund, however, you’re buying shares in an investment pool. The principal is not guaranteed by anyone. However, most money market funds invest primarily in safe, short-term government securities.
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Q: If I invest in a mutual fund offered by a bank, does the bank guarantee my principal?
A: No. Even if it’s being sold by a bank, a mutual fund is a separate entity. Principal is not guaranteed. Indeed, banks are coming under increasing pressure from regulators to make that distinction clear.
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Q: Does this (merger) deal set a precedent and make it more likely that my bank will buy a mutual fund company--or that a mutual fund company will buy my bank?
A: Possibly. The issues that pushed Mellon to merge are issues that many bankers have been facing for some time.
Namely, the conventional banking business has become hotly competitive, with mutual fund companies, insurers, mortgage bankers, savings and loans and brokerage firms all eating away at pieces of the banker’s business. Some speculate that in order to survive, big banks will have to diversify into areas such as investments and insurance. Most big banks are already doing so.
From the consumer’s standpoint, that means you’ll have to pay more attention to what you’re being sold--even if you are buying it from your friendly neighborhood banker.
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Q: Will fees and services change once the merger is complete?
A: At the moment, the companies say they plan to maintain all their current products and simply add new ones as a result of the merger.
In other words, Dreyfus won’t drop its no-load funds, but it may create a new line of load funds--the type that have up-front marketing fees and are sold in banks--to be offered in Mellon branches.
Fees can change at any time, but there is no immediate plan to raise--or lower--fees, the companies said.
Mellon-Dreyfus Merger
Mellon Bank Corp. will buy Dreyfus Corp., one of the nation’s best-known mutual fund companies, for $1.7 billion worth of stock. The deal illustrates the growing push by banks into new businesses to attract customers dissatisfied with low returns on traditional bank accounts. Mutual fund companies pool money from investors and put it in money markets, stocks, bonds and other investments.
MELLON BANK
* Pittsburgh-based Mellon is 23rd-largest bank holding company in the United States, with branches in Pennsylvania, Delaware and Maryland. It was formed in 1869 and is a major player in investment management, including mutual fund administration. * Total assets at year-end 1992: $31.5 billion. * 1992 revenue: $2.97 billion; profit: $437 million. * Boosted dividend 47% to 56 cents per share in November, second time this year. Company cited strong earnings and excess capital due to sluggish loan growth. * Purchased Boston Co., a financial services firm catering to the wealthy, in May for $1.45 billion from American Express.
DREYFUS
* New York-based Dreyfus is the nation’s sixth-largest mutual fund company, formed in 1951. It manages or administers 125 mutual fund portfolios with more than $80 billion in assets. It pioneered money market mutual funds and tax-free municipal bond funds. * 1992 revenue: $342.45 million; profit: $91.2 million. * Popularly known for its trademark lion featured in television commercials, which once emerged from the subway and strode down Wall Street. * Criticized in recent years for focusing on safe but low-yielding money market funds and shunning higher-growth stock funds. * Chairman Howard Stein, 67, approaching retirement age, is a longtime friend of Mellon Chairman Frank Cahouet, facilitating a friendly merger.
DEAL AT A GLANCE:
* Biggest yet in a series of recent moves by banks into mutual funds, an increasingly popular means for individuals to invest their money. Most other banks have set up their own mutual fund operations rather than buying others. * Mellon has a strong position managing and administering stock mutual funds, shoring up the weak position of Dreyfus, which has a large number of money-market and fixed-income funds. * Dreyfus shareholders to receive .88017 share of Mellon bank stock for each share they own. * Dreyfus to retain its headquarters and separate identity. Stein and Joseph S. DiMartino, Dreyfus president and chief operating officer, to join the Mellon board. * Mellon to take $73-million charge to pay merger expenses; expects slower earnings-per-share growth over next two years.
Sources: Dreyfus, Mellon, Standard & Poor’s.
Securities Acquisitions
The announced merger between Mellon Bank Corp. and Dreyfus Corp. eclipses other deals between financial services and securities firms in recent history. Here is a brief list of the largest acquisitions to date, in millions of dollars.
Date Merger Price Dec., 1993 Mellon Bank Corp./Dreyfus Corp. $1,700 March, 1993 Primerica/Shearson 1,150* May, 1988 CS First Boston/First Boston 1,100 Nov., 1987 Shearson Lehman/E.F. Hutton 964 April, 1981 American Express/Shearson 930 Oct., 1992 Franklin Resources/Templeton Funds 913 May, 1987 Primerica/Smith Barney 750 Oct., 1981 Sears Roebuck/Dean Witter 607 April, 1986 General Electric/Kidder Peabody 602 Nov., 1984 Equitable/Donaldson Lufkin 460 March, 1981 Prudential Insurance/Bache Group 396 March, 1984 Shearson-American Express/Lehman Bros. 360
* Including “earn-out” provisions of as much as $150 million granted to American Express over three years.
Sources: Securities Data Co., Wall Street Journal, Bloomberg Business News
