BNY Mellon Shareholders Welcome Activist Peltz: Real M&A

Bank of New York Mellon Corp. shareholders are rolling out the welcome mat for Nelson Peltz.

Shares of the world’s largest custody bank jumped yesterday to their highest price since the financial crisis after Peltz’s Trian Fund Management LP revealed a 2.5 percent stake and said it’s seeking talks with management and the board. The activist investor is stepping in after the $43 billion company’s margins and valuation trailed that of competitors State Street Corp. and Northern Trust Corp. for the past couple of years, according to data compiled by Bloomberg.

While BNY Mellon has already taken some steps to improve profitability, Trian could push it to be even more aggressive with cost cuts and to better consolidate its technology platforms and operations, said Sandler O’Neill & Partners LP. With $89 billion of cash, the New York-based company may be able to boost returns if it began lending like a traditional bank, according to Rafferty Capital Markets LLC. Selling off pieces of the business might be another avenue for creating value for shareholders, Credit Suisse Group AG said.

“Investors have been frustrated with the company for years,” Dick Bove, a Tampa-based analyst for Rafferty Capital, said in a phone interview. “It is significantly undervalued. Management has made the decision internally that they’ve got to shake this company up, and Peltz putting pressure on it is a big plus because it will ensure that these changes are going to be made.”

Trian Stake

Kevin Heine, a spokesman for BNY Mellon, said yesterday that “Trian is a respected investment firm” and the company looks “forward to engaging with them, as we do all our investors.” He declined to comment further. A representative for New York-based Trian declined to comment.

BNY Mellon had about $28 trillion of assets under custody or administration as of March. Custody banks keep records, track performance and lend securities for institutional investors. BNY Mellon also manages investments for clients.

Trian has amassed 28.9 million shares, according to an e-mailed statement from the hedge-fund manager yesterday. BNY Mellon’s stock surged 3.5 percent to $37.48, its highest closing price since Sept. 16, 2008.

Today, BNY Mellon shares climbed an additional 1.4 percent to $38.01 at 10:27 a.m. New York time.

“Investors have been waiting for a story to develop at BNY Mellon for some time,” Ashley Serrao, a New York-based analyst at Credit Suisse, said in a phone interview. “The knock has always been the expenses, so part of the reason why the stock is reacting favorably to Trian’s stake is that there’s now more hope that management will take a more aggressive stance as far as expenses go.”

Lower Valuation

Before Trian’s intentions were disclosed, BNY Mellon was valued at 1.1 times its net assets. That ranked among the lower price-book ratios for U.S. banks and financial-services providers larger than $10 billion and trailed Northern Trust’s 1.9 and State Street’s 1.4, according to data compiled by Bloomberg based on June 27 closing prices.

The company has also been less successful in converting revenue into profit. BNY Mellon’s pretax margin was narrower than both State Street’s and Northern Trust’s in four of the past five fiscal years, data compiled by Bloomberg show.

Trian’s stake “seems like a spark in a flammable situation,” Mike Mayo, an analyst at CLSA, wrote in a report yesterday. “Trian should have support for proposals that it might want to push forward.”

Cutting Costs

Like other custody banks, BNY Mellon has been under pressure to cut costs as low interest rates squeeze investment income and revenue from securities lending. In addition to relocating its New York headquarters to scale down office space, the company said in May that it’s making reductions to its workforce that may save it $100 million annually.

There’s more BNY Mellon can do to boost profitability, including further streamlining its back-office operations and computer systems and investing in better technology, Jeff Harte, a Chicago-based analyst at Sandler O’Neill, said in a phone interview.

Simplifying the company by selling certain units would be another way to help eliminate its “conglomerate discount,” Serrao of Credit Suisse said. BNY Mellon confirmed in May that it was exploring a sale of its corporate trust business, which Bloomberg News reported in April.

BNY Mellon’s returns would “skyrocket” if it were to lend out some of its “staggering amount” of cash, Rafferty Capital’s Bove said. The company had a return on equity of 8.2 percent last quarter, less than half the average for its peers, data compiled by Bloomberg show.

Priced In

Another use for its cash -- and likely to be part of Trian’s plan -- would be to return some to shareholders, James Mitchell, a New York-based analyst at Buckingham Research Group, wrote in a report yesterday. Similarly, State Street ended up returning capital to investors after Peltz prodded the company in 2011 to improve its performance.

State Street’s shares had more than doubled by the time Peltz sold his holdings in the third quarter of 2013. His other investments include PepsiCo Inc. and Ingersoll-Rand Plc.

The upside for BNY Mellon shareholders may be limited, said Jim Shanahan, a St. Louis-based analyst at Edward Jones & Co. BNY Mellon’s stock is already higher than analysts’ average share-price estimate for the next 12 months of $36.43, according to data compiled by Bloomberg.

“The market has already somewhat rewarded BNY Mellon for things that they haven’t completed yet,” Shanahan said in a phone interview.

To Harte of Sandler O’Neill, there’s still room for improvement and value that could be created as a result.

“The company could be more efficient and probably should be,” he said. “To the extent they become more and more incrementally profitable, that’s good news for the stock price.”

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