BNY Clients Apprehensive About Acquisition

BNY's acquisition of Pershing and its stellar technology looks great on paper, but some BNY clients now fear price hikes.

When the Bank of New York announced the acquisition of Pershing, the world's largest correspondent-clearing firm, in January, there were pats on the back and the clinking of glasses by all - all, that is, except BNY clients.

The acquisition, which is the largest of BNY's several-year spree, is expected to benefit BNY customers by offering them enhanced products and technology, as Pershing is known to have one of the best clearing platforms in the business.

The bank's plan is to migrate the "vast majority" of its clients to Pershing's homegrown clearing platform within nine months, says Joe Velli, senior executive vice president and head of BNY Securities Group. The only BNY technology that will remain in place is its front end called Compass. Velli says that analysis will be done to "fill in any existing gaps" between the two systems to come up with the best of both firm's technology. Pershing's client operations, for the most part, will remain unchanged.

This migration to the Pershing platform, which would seem a promising move for BNY clients, is what is troubling them.

One of the primary reasons? Cost. Pershing attracts larger firms with higher volumes and larger budgets for clearing services than BNY clients. BNY clients agree that Pershing's technology is superior, but using it comes with a high price tag. Most BNY clients are smaller firms with lower trading volumes who, although they understand the benefits of Pershing's platform, can't afford to use it.

"We had a choice of clearing firms, and if we had wanted to use Pershing we would have. It's just not the right choice for us economically," notes one wary BNY client, who requested anonymity.

Some BNY clients also say they were very content with their relationships with the bank's representatives and felt that they were given the attention they needed, despite the size of their firm. Now they fear they will be small fish in a big pond, and their needs will come second to Pershing's clients, who are larger revenue generators.

"Although we are a small firm, we have very specialized needs. We were one of the larger of BNY's clients and therefore were always given the attention we needed. We worry now that we won't receive that attention in the future," notes the client.

In addition, due to the great deal of consolidation in the marketplace over the last few years, many BNY clients have been through several acquisitions and one more only means another disruption. Each time a merger or acquisition takes place, these broker/dealers have had to change platforms and transition to the processes of a new firm.

Yet another sticking point is that changes to processes and services that were in the works have now come to a screeching halt. "We have been told to wait until the acquisition is complete, which isn't until this summer. We were expecting to roll out these add-ons to our clients within the next few months," notes the BNY client.

BNY's Velli has done what he can to pacify customers' concerns. He says that the bank is doing all it can to make this a smooth transition for clients and will do everything it can to retain its full client base.

On the matter of cost, he says that despite the acquisition, the bank will honor all existing contracts regarding cost structures. If clients have one-year, two-year, etc, contracts their pricing will remain as negotiated, despite the transition to the Pershing system.

"Our financial model for acquisition was to retain the vast majority of BNY Clearing's client base. It would make no business sense, from our standpoint, to scare these client's away... . We are not going to routinely go around increasing pricing," says Velli. When asked if BNY clients would be held up to different pricing standards than Pershing clients once the acquisition is complete, he says, "We haven't decided what our future pricing offering is going to be, but it is fair to say that existing clients will not be impacted by whatever our pricing philosophy is on new business in the future."

Furthermore, he emphasizes that BNY is keeping its client-servicing teams in place, so whomever the client dealt with in the past will not change, nor should its level of service and attention.

As far as the wait to roll out new products to client's customers, Velli can only say that, in the long run, these services will be far superior to any that BNY would have rolled out independent of Pershing. Basically, it will be worth the wait.

What will BNY clients likely do? One says it would hope that it was the last to be scheduled for the transition from the current Milwaukee-based Beta platform, which BNY uses through an outsourcing arrangement, to the Pershing system. At that point, the firm would make a decision as to whether it will remain on board. The client says her firm may consider self-clearing using the Beta system and, perhaps, even open the system to other small firms to gain the scale needed to make the undertaking cost effective.

What other clients will do is unclear. However, the industry agrees that there isn't much choice left for smaller firms. With all the consolidation in the market, there are only a few players left and, of them, Pershing is probably the best choice. As a result, most clients will likely go through with the transition.

The best-case scenario, this client says, would be if BNY could keep the Milwaukee operation running - where the Beta system resides - for BNY clients. That is not likely to happen as one other source noted that that operation is already in the process of being dismantled.

"I just spoke to a few people in Milwaukee and it looks like they are consolidating back in Jersey City. There is a move to consolidate around the bigger client base. Those guys aren't very happy," the source says.

Velli would not comment on the consolidation of the Milwaukee operation, other than to say BNY plans to keep a presence in the Midwest. However, he says, he can't change economics. In order for this acquisition to be successful and cost effective, it would be unrealistic to keep two clearing systems running. He emphasizes that Pershing has the best technology in the industry and, as a result, he believes this is the best move for his customers in the long run.

"I would be concerned about migration as well but even if (existing BNY clients) leave us, they will have to go through a migration (to that provider's platform). This is a rapidly changing industry where we believe there will be more consolidation, not less. With us, this is it. There won't be any conversions after this. If they leave us and go somewhere else, someone else may make an acquisition and they will have to go through, yet again, another migration."

Velli added that it is unclear how, or if, Pershing's and BNY's operations centers will be consolidated. BNY has clearing facilities all over the world including New York, London and Milwaukee, while Pershing's main center is located in Jersey City, N.J.

"No firm decision has been made. We have to consider contingency planning, as we don't want to have all of our sites under one roof," Velli says, adding, "We will go through those decisions very carefully. We don't have answers right now."

Bill Andrews, associate partner in Accenture's Global Financial-Services Group, says that the merger indicates a mounting trend of both consolidation and increased focus on clearing operations as they are becoming more desirable.

"Margins have really shrunk and, although trade volumes are down, no one seemed to pay attention to clearing. Now it will be evident that clearing is an area that should get more attention," he says.

He adds that, in order for the new BNY to be successful, it will have to continually invest in its clearing technology. "This is different from other mergers where two brokerage firms unite. This is a business that is all about efficiency ... . If you are going to be in this business you have to do it right," Andrew's says.

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Rationalizing Headcount
Joe Velli, senior executive VP and head of BNY Securities Group, says the bank will take on Pershing's 4,000 employees at first and will determine how it will proceed from there. Velli would not comment on how many jobs would be lost. Tom Renyi, chairman and chief executive officer of BNY, says that the bank "will rationalize the headcount of BNY Clearing and Pershing and eliminate redundant technology spending." Pershing's management team will remain in place, led by Richard Brueckner, chief executive officer. Mike Viviano, who runs BNY's domestic clearing business and Frank La Salla, who runs BNY's global clearing business, will remain key players.