M&A: Survival of the Fittest in the 21st Century, Strategic Positioning in the Banking and Communications Industries - Should a Bank Acquire, Merge, or Divest
Fordham Journal of Corporate & Financial Law
Bank Acquire
Merge
or Divest
Maureen S. Bateman
-
1996
Article 9
Copyright c 1996 by the authors. Fordham Journal of Corporate & Financial Law is produced
by The Berkeley Electronic Press (bepress). http://ir.lawnet.fordham.edu/jcfl
SHOULD A BANK ACQUIRE, MERGE OR DIVEST? *
MAUREN SnE
BATEum*
Keynote Speaker
INTRODUCTION
I want to go through a specific bank's experience in evaluating its individual businesses and what
led it to decide whether it should merge, spin-off, or acquire. In particular, I will focus on the legal
implications of these decisions. The bank which I will use for this discussion will be U.S. Trust Company
of New York ("U.S. Trust").
I NON-DISCRETIONARYBUSINESSES
U.S. Trust is an institution with capital assets of about $4 billion and value to shareholders of
approximately $363 million.'
Its businesses generally fit into two categories: discretionary and
nondiscretionary. The non-discretionary businesses involve back-office processing for unit investment trusts
This speech was part of a symposium held at Fordham University School of Law on March 12, 1996 entitled
M & A: Survival of the Fittest in the 21st Century, Strategic Positioning In the Banking and Communications
Industrie.s.. Ms. Bateman is Senior Vice-President &General Counsel for U.S. Trust. Prior to joining U.S. Trust, Ms.
Bateman was an Attorney at Bankers Trust and Morgan Guaranty Trust and an associate at Davis, Polk & Wardwell.
IPress Release from United States Trust Company of New York, U.S. Trust Agrees to Sell Securities
ProcessingBusinesses to ChaseManhattan,PR NEwsWiRE, Nov. 18, 1994 [hereinafter Press Release]; U.S. TRUsT
COMPANY OF NEw YORK,INC., Proxy Statement (Feb. 9,1995) [hereinafter Proxy Statement], at 1 (indicating that the
value on the closing date of the merger would be less than $363.5 million).
(UTM), master trusts, and mutual funds.2 The non-discretionary side is generally a high volume,
backoffice processing business with low profit margins.
A. UITBusiness
The UIT business is a closed-end investment securities portfolio, generally comprised of municipal
bonds although some contain high-yield bonds. UITs are passive asset pools administered by a trustee,
who serves as custodian, recordkeeper, income collector, disburser, and transfer agent.3 UITs have natural
maturities and the individual investor buys a piece known as a unit.
The unit investment trustee retains custody of the units and receives payments from the various
securities that are held by the UIT, but only makes disbursements to unit holders every six months. This
creates a tremendous float for the trustee. While the trustee receives payments throughout each six month
period, the trustee makes disbursements only twice a year. In the interim, the trustee retains the use of the
cash and receives fees based on the amount of assets held. These fees gradually decrease throughout the
term of the trust because the assets are disbursed as they mature.
UITs are not as popular today as in the past. The mutual fund, or open-end mutual fund, industry
is much stronger and people tend to invest in them more than in UITs, which have an older, more
4
conservative market.
2Proxy Statement, supranote 1, at 28 (regardingU.S. Trust's five lines of business). According to the Proxy
Statement, U.S. Trust "conducts five principal businesses: asset management, private banking, special fiduciary,
corporate trust and securities processing." Id.
3U.S.TRUST COMPANY OFNEW YORK,INC., U.S. TRUST: A HISTORY OF GROWTH WrrHA COMMITMENT TO
PERSONAL SERVICE, Jan. 1994, at 9 (unpublished document, on file with U.S. Trust Company of New York).
4See Chet Currier, Funds Low-Key Relatives: UnitInvestment Trusts,Cfu. SUN-TIME,
B. Master Trust Business
The second non-discretionary business, the master trust, is a high volume business.
To remain
competitive in this business, you have to implement the latest technology in data processing. For U.S.
Trust, this would have required a large investment to strengthen the global custody and multi-currency
businesses.5
C Mutual FundBusiness
The mutual fund servicing business is also an operations oriented business with a low profit
margin. Businesses with low profit margins rely on a high volume of transactions, with a large number of
them being the same, so that they can build up their profit
Maintaining high volume is the key to
nondiscretionary securities processing business.
R DISCRETIONARYBUSINESSES
The other side of the business is discretionary in nature and yields high profit margins. It includes
private banking, custody, and trusts and estates businesses.
Private banking is involved in the more
traditional banking businesses of accepting deposits, making loans, administering checking accounts and
5 See Proxy Statement, supra note 1, at 31. According to the Proxy Statement, the U.S. Trust board, in
reaching this determination and recommendation considered the follow (...truncated)