Mellon's no lemon

6 Jan 2006 By Antony Currie Follow @AntonyMCurrie

Highfields Capital Management wants to break up the US asset management firm. But that ignores synergies binding the business together. Furthermore, Mellon has taken the right steps to reduce its stock discount, and its businesses are performing well.

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Late last month Highfields Capital Management managing director Richard Grubman sent an open letter to Marty McGuinn, chairman and chief executive of Mellon Financial. In it Grubman argued that Mellon should be broken up as its stock has underperformed both its custody and assetmanagement peers.

According to research by Morgan Stanley, Mellon is already trading just below the sum of its parts. Using the 17.2 multiple of competitor Investors Financial Services for the processing business, the large cap bank multiple of 12 times earnings for the payments and treasury divisions, and the average multiple of 19 times earnings for asset managers, Mellon is worth $15.7bn, compared to its current price of $14.7bn.

The letter capped several months of speculation by investors and the press that Mellon should pursue one of several restructuring possibilities, including a breakup, an outright sale or a merger of equals.

Mellon maintains that it isn't considering a breakup, nor is it up for sale, although it has shown an interest in buying other assetmanagement businesses. The board is searching for a successor to McGuinn, who is due to retire in September 2007. This week's reorganisation of its Dreyfus assetmanagement unit appears to have made vicechairman Ronald O'Hanley the leading internal candidate.

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