Mellon Bank to Buy Dreyfus Corp. for $1.7 Billion

NEW YORK —  The walls that once separated segments of the financial services industry crumbled further Monday as Mellon Bank Corp. announced that it would acquire the Dreyfus Corp., one of the nation’s best-known mutual fund companies, in a stock swap valued at $1.7 billion.

The deal will make Pittsburgh-based Mellon--which last year bought Boston Co., a big fund-management firm, for $1.45 billion--one of the largest fund managers in the country, with a total of $215 billion in assets under its control. Analysts said it could presage further combinations of banks and mutual fund companies.

Mellon and Dreyfus executives said the merged companies would be able to offer consumers “a complete array of high-quality financial products” ranging from mutual funds to credit cards to financial advisory services.

Association with the Dreyfus name and its well-known lion trademark provides a national identity for Mellon, up to now a mid-Atlantic regional bank--albeit one with a significant role in managing money for companies and the wealthy. Dreyfus is the nation’s sixth-largest mutual fund company, in terms of assets.

For the firms, the main benefit of the merger will be the opportunity to sell Dreyfus products to Mellon customers--and vice versa. Dreyfus’ 900,000 customers will become top prospects for Mellon credit cards and loans. Mellon’s 1.1-million banking customers in Pennsylvania, Delaware and Maryland will be offered Dreyfus mutual funds.

Mutual funds--which enable individuals to invest in stocks and bonds via large, professionally managed pools--have become very popular in recent years as small investors look for ways to improve on the meager returns that banks now offer on savings accounts and certificates of deposits.

In turn, banks across the country for years have been facing intensified competition from mutual fund companies and stock brokerages, which in many cases provide almost all the services associated with banks, including checking accounts. They also have suffered from a lack of demand for loans in the slow economy.

As a result, banks have been on the prowl for new businesses, and mutual funds are an obvious choice. Most major banks--including Bankamerica, Wells Fargo, Citicorp and Continental--have begun to sell mutual funds through their branches.

Some sell their own funds; others offer funds managed by independent companies, including Dreyfus. Indeed, these initiatives have become so widespread that federal regulators are taking a harder look at how banks sell funds, which unlike bank deposits are not federally insured.

“Mutual funds have come onto center stage for many banks,” said Michael Lipper, president of Lipper Analytical Services, which tracks mutual fund performance. He predicted that further combinations might come about next year if the Mellon/Dreyfus deal appears to be working.

However, some of the major mutual fund firms--including industry leader Fidelity Investments and Los Angeles-based Capital Group--are privately held and are considered uninterested in being acquired.

In its specifics, analysts said the Mellon/Dreyfus merger makes strategic sense. Still, many Mellon bank shareholders apparently were concerned in the short term about the deal’s impact on profits. And some analysts suggested the price being paid for Dreyfus was too high. The bears noted that any substantial decline in the bond market could prompt skittish bond fund owners to flee, eroding Dreyfus’ value.

The result: Mellon shares plunged $4.375 to $53 on the New York Stock Exchange, while Dreyfus shares jumped $1.875 to $46.375.

Fans of the deal said Mellon was acquiring a plum, even though Dreyfus has been criticized for a relatively narrow emphasis on money-market and bond funds.

“Mellon is getting a world-class asset, one of the most visible and recognizable names in finance,” said Don Phillips, vice president of Morningstar, a mutual-fund rating service.

The merger agreement, which the companies hope to complete by the middle of next year following regulatory approvals, calls for Dreyfus to remain a free-standing company, retaining its New York headquarters and its current management team.

But some operations will be combined, and Mellon Chairman Frank V. Cahouet acknowledged at a New York press conference that there could be layoffs.

* INVESTOR IMPACT: Answers to questions about the blurring lines between banks and mutual funds. D1