Editor’s note: Before its merger with Mellon Financial took over the news, the Bank of New York pulled off a complex asset swap with J.P. Morgan Chase. In this interview, which appears only on CFO.com, vice chairman Bruce Van Saun explains the details of the smaller, but more complicated, deal.
Bank of New York Co.’s agreement to merge with
Mellon Financial Corp. — a blockbuster $16.5 billion deal that would create the world’s largest securities servicing and asset-management firm followed a smaller but significant deal that Bruce Van Saun saw through last year, a rare type of transaction called an asset swap. The swap traded BNY’s 338 regional retail branches, valued at $3.1 billion, for J.P. Morgan Chase’s global corporate trust business, valued at $2.8 billion. An asset swap can be an attractive alternative to a traditional acquisition since it makes it possible to avoid tax on any gain in value, but the assets must be similar enough to satisfy the Internal Revenue Service. Van Saun, who recently moved up to vice chairman after nine years as CFO (and will become CFO again of the merged BNY/Mellon organization), explains how and why the swap was done.
Instead of the asset swap, why didn’t you
simply sell the retail branches?
We looked at whether we should pursue an outright sale.
We certainly knew there were players besides Chase that
wanted to further their position in the tristate market
[New York, New Jersey, and Connecticut]. We also
looked at a spin-off. We thought a swap was our best
alternative, because we gained a very attractive asset and
reinvested in our core business in the process.
What did you like about Chase’s trust
There are two interesting aspects of the corporate trust
pieces. One is the increasing sophistication in the debt
markets, where there are more-structured products like
CDOs [collateralized debt obligations] and CLOs [collateralized
loan obligations]. There’s a need for sophisticated
trustees to be able to handle the administrative
services that go with that. It’s high growth, so that’s an
attractive part of the business. The second part we like is
the international dimension that Chase has. We’re picking
up an additional 15 overseas locations.
What’s happening overseas is analogous to what
happened here in the United States 15 or 20 years ago.
We used to have banks providing 80 percent of debt
financing and the capital markets providing 20 percent.
Today, that has flipped. Internationally, we [still] have
banks providing 80 percent of debt financing. As that
moves to more of an intermediated market, it increases
the demand for trustee services. So we see a lot of
growth potential outside the United States.