Both Bank of New York and Mellon Financial's shares surged yesterday (12% and 7% respectively) on news two of the oldest U.S. financial institutions will merge. The combined entity will have $16.6 trillion in institutional investor assets under custody (to become the world's largest) and $1.1 trillion in assets under management (5th U.S. largest). The Wall Street Journal published a summary of analysts' reactions, which were overwhelmingly positive -- most rating Bank of NY a "buy" or "outperform," with price targets ranging between $36-$42. The Bank of NY-Mellon merger is valued at $16.5b with the WSJ reporting Mellon shareholders will receive one share in the company for each Mellon share and Bank of NY shareholders to receive a 0.9434 share per each share. Fitch affirmed all ratings of both firms and assigned a "positive outlook." A Bank of NY press release said the merger is expected to be 1.0% dilutive to its '07 operating earnings, but accretive from '08, and will be 1.0% accretive to Mellon's '07 earnings." The merger is expected to close by Q3'07, with cost savings estimated at $700m annually, or 8.5% of combined expenses. Mellon's CEO Robert Kelly will lead the merged entity, although Bank of NY will have 10 of 18 board seats and 63% ownership.
• Sources: Press release [pdf], Business Wire, The Wall Street Journal [I, II]
• Potentially impacted stocks and ETFs: Bank of New York (NYSE:BK), Mellon Financial (MEL). Competitors: Northern Trust (NASDAQ:NTRS), State Street (NYSE:STT), Investors Financial Services (IFIN). ETFs: streetTRACKS KBW Bank (NYSEARCA:KBE), streetTRACKS KBW Capital Markets (NYSEARCA:KCE), iShares Dow Jones US Regional Banks (NYSEARCA:IAT), Regional Bank HOLDRs (NYSEARCA:RKH)
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