Why Dreyfus May Help Round Out Mellon

When Mellon Bank stock tumbled to 51 on Dec. 8--down from 57 just two days before--money runner Edgar Wachenheim III jumped. He snapped up shares of the nation's 23rd-largest bank holding company at what he deemed a bargain. The stock had come under heavy selling pressure after Mellon announced it had agreed to acquire Dreyfus, the sixth-largest mutual-fund company, in a stock deal worth $1.7 billion.

While arbitrageurs were buying Dreyfus shares and shorting Mellon, savvy pros such as Wachenheim felt it was worth going all out to accumulate Mellon stock because of what the deal would bring to Mellon's business.

"Mellon is making a transition from being just a bank to becoming a high-quality, aggressive financial-services company," explains Wachenheim, chairman and CEO of Greenhaven Associates, an investment firm with assets of $600 million.

With the Dreyfus acquisition, about 60% of Mellon's revenues would come from fees (as opposed to interest income) from such services as investment management and data processing for Dreyfus' more than 180 mutual funds--with total assets of $80 billion.

BLUE RIBBON. "Mellon will become the second-largest money manager [in the U.S.], with a total of $215 billion," says Wachenheim. In first place is Fidelity Investments, which manages some $250 billion.

Some analysts worry that the acquisition might slow Mellon's earnings growth. But not Wachenheim, who believes that, under Chairman and CEO Frank Cahouet, Mellon could extract the best from Dreyfus' investment and mutual-fund operations. Indeed, Cahouet stated on Feb. 8 that over the next two years Mellon's return on equity (with the Dreyfus merger) should reach 17%, and its return on assets 1.7%. Earnings growth, added Cahouet, should be in the double digits in 1995 and beyond.

Wachenheim figures that a 17% return on equity in 1996 will work out to earnings of $8 a share. He calculates that a 1.7% return on projected assets of $45 billion also works out to $8, for the 95 million shares that will be outstanding after the merger.

The money manager reckons Mellon will be worth 96 a share in two years, with a price-earnings multiple of 12. He foresees earnings of $6 a share this year, $6.75 next year, and $8 in 1996. "A p-e of 12 seems modest for a high-quality financial-services company with a projected annual double-digit growth rate," Wachenheim says.

Before it's here, it's on the Bloomberg Terminal.