Mellon Spurns Hostile Bid by Bank of N.Y.

Bank merger mania turned nasty Wednesday as Bank of New York Co. launched a $24-billion hostile bid for Mellon Bank Corp. that analysts say is likely to fuel more bank deals involving less-than-friendly partnerships.

The hostile takeover attempt--highly unusual in the staid banking industry--stands in stark contrast to several recent bank deals that have been announced with much fanfare by those banks’ executives. But analysts say hostile bids may become more common as the pressure intensifies for banks to find merger partners or risk being left behind.

Mellon executives immediately rejected the offer.

So far, the biggest deals, including a $70-billion merger between Citicorp and Travelers Group Inc. that would create the world’s largest financial services company, and a $62-billion pact between BankAmerica Corp. and NationsBank Corp., have been more than amicable. Many banks are looking to combine to cut costs and increase revenue by expanding here and overseas.

A Bank of New York-Mellon combination would create the nation’s 10th-largest bank.

Bank of New York officials said they began the takeover bid after executives of the two banks failed several times to strike a deal and two days after Mellon’s chief executive rejected the other’s most recent request for a meeting.

“Since you declined to meet with me, I thought it appropriate to follow up with this letter for consideration by your board of directors,” wrote Thomas A. Renyi, chairman and chief executive of Bank of New York. “I remain totally convinced . . . that a combination of our two companies would make compelling business sense and would be in the best interest of both banks.”

Mellon Chairman and Chief Executive Frank V. Cahouet immediately rejected the latest attempt, saying the company is “not interested in pursuing a transaction” and that it isn’t for sale.

The combination would be “contrary to the best interests of our shareholders, employees, customers and--in particular--the communities we serve,” Cahouet said in a statement.

Nevertheless, Wall Street seemed to relish the idea that Pittsburgh-based Mellon appeared to be in play. In trading on the New York Stock Exchange, shares of Mellon Bank climbed $8.13, or 12%, to close at $78; Bank of New York fell $2 to close at $62.06.

Other bank stocks also rose on speculation of further consolidation in the industry. In NYSE trading, Wells Fargo & Co. rose $5.13 to close at $380.13, and Fleet Financial Group closed at $90, up 2.13.

“It makes tremendous sense,” said Carla D’Arista, a bank analyst with Arlington, Va.-based Friedman, Billings & Ramsey. “Both the cost-savings assumption and the revenue enhancements [projected by Bank of New York] are extremely conservative.”

In making the bid, Bank of New York said the combination would bolster earnings per share in two years and estimated the deal would shave $700 million in costs and add $100 million in revenue. The merger would also join two large retail operations with more than 800 branches that stretch across nine Eastern states.

In addition, analysts said, the merger would create a huge fee-generating machine, combining Mellon’s highly profitable asset management and corporate banking with Bank of New York’s strong operations in securities processing, including handling Treasury bond transactions.

Combined, the bank would generate more than 60% of its revenue from fee-based businesses, compared with about 30% for most banks. Mellon’s Dreyfus Co. unit is the largest mutual fund manager in the banking industry; Bank of New York dominates the government processing business.

Financial institutions have been moving away from reliance on interest margins derived from loans, which have been shrinking and are more susceptible to gyrations in the economy.

“It’s a very sound transaction,” said Lawrence W. Cohn, senior bank analyst with Ryan, Beck & Co. “Clearly the issue is not economic but more with social and personality conflicts. I gather those issues have kept the deal from taking place quite a long time ago, and now Bank of New York wants to force the issue.”

Both Harris Associates in Chicago and T. Rowe Price of Baltimore, two of Mellon’s largest shareholders, with about 3% each, said the merger would make sense and that they will push company directors to consider it.

“It’s an attractive proposal,” said Brian Rogers, who oversees a $14.5-billion fund. “We’ll be talking to Mellon to let them know where we stand.”