BoNY by name, acquisitive by nature
Another month, another deal. Corporate lawyers must have become airborne at The Bank of New York in recent months. Not that its rivals have been idle, but BoNY (the acronym, forbidden within the bank, still sticks in the market) has had a white-hot year of corporate activity. Caroline Allen looks at recent deals.
This article appears courtesy of Global Investor.
As a warm-up, way back at the start of the year, there was the bank's double acquisition of Alcentra, a small asset manager of sub investment grade debt and structured grade products, and of Urdang, a unit specialising in private equity management and REIT securities portfolios.
In Q2, the bank joined forces with Eze Castle Software LLC and GTCR Golder Rauner LLC to form BNY ConvergEx Group, a momentous move bringing together an array of trade execution, commission management, independent research and transition management businesses.
Next came a deal exchanging JPMorgan Chase's corporate trust business for The Bank of New York's retail banking and regional middle-market businesses.
Before the ink was dry on that, there was the bold decision in Europe to sell Rufus, the bank's transfer agency software business, to Australia's Bravura Solutions. And finally, a textbook exit from a successful joint venture, when the bank bought out the 50% stake held by its partner Allied Irish Banks (AIB) in its fund servicing business in Dublin.
According to analysts, the most significant transaction is the JPMorgan Chase deal, regarded as "transformational" for the bank in corporate trust, both in the US and internationally. It will now serve a combined client base with US$8 trillion in total debt outstanding across 20 countries.
"It has got Bank of New York out of retail banking, which they were not committed to and were not investing enough dollars in to grow," says Jason Goldberg, analyst at Lehman Brothers in New York. "That's a capital intensive business, so you will see an impact pretty soon on the growth rate. In exchange they have picked up the JPMorgan corporate trust business, which has just greatly leveraged their scale and presence. That will certainly add value over time."
Under the terms of the agreement, the Bank of New York sold its retail and regional middle-market businesses to JPMorgan Chase for US$3.1 billion, with a premium of $2.3 billion. JPMorgan Chase simultaneously sold its corporate trust business to The Bank of New York for $2.8 billion with a premium of $2.15 billion. The difference resulted in a net cash payment of $150 million to The Bank of New York, plus a contingent payment of up to $50 million tied to customer retention.
The deal plays to the bank's core expertise, and will allow diversification of revenue, both geographically and by product. "It's neat, a lot of upside from one business swap," commented a London-based analyst.
The main ingredients for the BNY ConvergEX Group deal, completed in October, were the multiple fund servicing businesses of the Bank of New York Company, the software capabilities of EzeCastleSoftware and the leavening properties of funds from Chicago-based private equity firm GTCR Golder Rauner LLC, a longtime investor in transaction processing and payments companies.
BNY ConvergEX (the brand name reflects the convergence of technologies required to provide open solutions that span the investment cycle) is widely seen as the most innovative and significant business reconstruction in the sector in recent months. The bank and GTCR Golder Rauner each have a 35.4% stake, with the balance held by Eze Castle Software investors, and the new management team. The Bank of New York Company's Pershing subsidiary, a global provider of clearing and financial services outsourcing, is not included in the transaction.
The new affiliate is headed by Joe Velli, who becomes chairman and chief executive. He has already declared an "entrepreneurial" culture, aiming to leverage the power of EzeCastle's technology, the execution and research capabilities of the former BNY Securities Group, and the flexible and powerful capital base of the private equity investor.
The unit will encompass BNY Brokerage, including BNY Global Transition Management; Lynch, Jones & Ryan (specialising in commission recapture); G-Port; Westminster Research (offering commission management via a network of 30 institutional trading desks); and BNY Jaywalk. Each will retain its respective brand name while taking advantage of the combined capabilities of BNY ConvergEx. The Bank of New York's B-Trade and G-Trade businesses are expected to become part of BNY ConvergEx Group in 2008, although in the interim they will continue to be owned by the Bank of New York.
"This was a good example of doing what you are always telling your clients to do – focus on core competencies and redeploying capital more usefully," says Goldberg at Lehman.
Bravura picked for Rufus
While the BNY ConvergEX deal enhanced a core offering, the sale of Rufus to Bravura for a maximum of £32 million was a timely exit from turf that was never the Bank of New York's home ground. However, Kin Corning, chief operating officer, stresses that it was a careful disposal.
"We went through the normal processes of appropriately financed companies etc but we were specifically excluding pure financial buyers, or those looking to group transfer agency systems. We were including companies with a balanced UK and international policy and those looking to grow a specific software system."
The Bank acquired Rufus in 1999 and has nurtured it through testing times before markets and sales really picked up in 2005. Corning was not about to let an investment of tens of millions of dollars evaporate. "We realised we had reached an inflexion point. Rufus needed new R&D investment and it is not an endlessly scaleable business. We wanted to maximise the opportunity for the software to succeed and to generate clients to support the investment."
Australia-based Bravura is a specialist provider of wealth management and other applications, such as its Sonata platform. It has completed five acquisitions since it was established in 2004 as part of a management/leveraged buy-out that acquired the corporate and superannuation business unit of CSC Australia. Already active in Asia, the firm is keen to establish itself in the UK market as a springboard into Continental Europe.
The Bank of New York will remain Bravura's largest client. With a base deal for five years the bank has made a further "material, multi-year" commitment. "We expect the relationship to survive longer," says Corning. "It means we can sharpen our focus on continuing to provide a high quality transfer agency service to our clients across Europe, while continuing to benefit from the Rufus software platform."
"This seems to be a good, logical deal all round," commented one technology consultant. "What is a financial services company doing with a software firm? A five year deal is a solid base, and Rufus is a very good product, multi currency and functionally rich, in a very fragmented market. BoNY retains the connection but can remain focused on their core business as well." Bravura will be able to tap into rapidly growing fund servicing industries in Dublin and Luxembourg.
"This deal was the icing on the cake for a good year at The Bank of New York," comments Lehman's Goldberg. "They had made a considerable investment in Rufus and not only did they do a good job picking the partner and the OMS software system, but they now have an introduction to good hedge fund clients as well."
AIB joint venture
In contrast to other disposals, the bank has consolidated its presence in Dublin, where it has bought in the 50% stake it did not own in its joint venture with Allied Irish Banks, AIB BNY Securities Servicing. No figures were disclosed for the deal, which goes back 11 years.
"That is the way we do things," explains Corning. "We teamed up with a local partner first, then grew the business until we reached a critical point. Now the firm needs a sole owner if it is to grow and it fits with our strategy." The firm, handling onshore and offshore fund administration, has some US$210 billion of assets under administration.
The new unit becomes BNY Securities Services Ireland Ltd, headed by Joe Wheatley, who is already running fund administration there.
While each business is driven by its own executives, analysts say the bank has exceptional leadership in Thomas Renyi, who has transformed a traditional commercial bank into a global leader in securities servicing, and, in Bruce Van Saun, now vice chairman and leader of the bank's market-related businesses.