BNY’s Chief Sounds Ready for a Deal. Is Northern Trust the One?

Chicago-based Northern Trust has tended to Midwest family fortunes for 135 years. (Christopher Dilts/Bloomberg)

Robin Vince spoke with Barron’s about M&A amid reports that his firm approached Northern. Why banks for the superrich are tough acquisition targets.

When word spread this past week that Bank of New York Mellon had approached Northern Trust about a possible acquisition, some industry observers were skeptical a deal would happen. Acquisitions of trust banks–specialized firms that cater to the ultrarich–can be devilishly tricky, and Northern Trust is one of the biggest of the bunch.

Making matters worse, Northern Trust immediately announced that it’s not for sale. But BNY’s chief executive, Robin Vince, clearly has deals on his mind.

In an interview with Barron’s, Vince said he wants to bulk up in investment and wealth management, though he wouldn’t comment on a Northern Trust deal.

“Disciplined M&A needs to be part of the tool kit of any thriving company,” said Vince, a Goldman Sachs veteran. “It doesn’t mean all deals are good deals. But having a thoughtful, horizon-scanning approach to identify opportunities in M&A to advance our strategy is a sensible thing to do for the benefit of shareholders.”

The Wall Street Journal first reported on BNY’s interest in Chicago-based Northern Trust. Both companies have large asset-servicing businesses that provide custody, fund administration, and other services to institutions. If they joined forces, the combined entity would have $70 trillion in assets under custody. Then there’s Northern Trust’s wealth management business, which long has handled some of the Midwest’s biggest fortunes. It had assets under management of $447 billion as of March 31, which generated just over half of the bank’s profits.

But an acquisition definitely would face obstacles, starting with Northern Trust’s reluctance. “While our policy is to not comment on market rumors, I can tell you that Northern Trust is fully committed to remaining independent and continuing to deliver long-term value to our stakeholders, as we have for the past 135 years,” a Northern Trust representative said in a statement.

That stance highlights the independence of the nation’s trust companies. Even as consolidation has upended financial services, firms like Bessemer Trust, Chilton Trust, Glenmede, and Wilmington Trust have quietly gone about their business. They mainly tend to the complex financial needs of multiple generations of wealthy families, many with assets of $50 million and up.

“It is a small part of the galaxy of business models that provide wealth management,” says consultant Jamie McLaughlin. “There are not a lot of firms of that type. And these tend to be older, legacy firms that would be difficult to integrate.”

Systems integration could be especially hard with two larger organizations like BNY and Northern Trust. “I think the reason we haven’t seen merger talks between two global custodians with big trust businesses is because it would be a messy integration,” says an industry insider. “They are working on legacy chassis technologies and it would be a royal pain to put those together.”

What’s more, trust company acquisitions may not offer many opportunities for cost-savings. “You can’t scale that service downward because the service they provide is team-based and bespoke,” says Alois Pirker, CEO of consulting firm Pirker Partners. “It’s great for multimillionaires, but you can’t go lower.”

Customer care is no easy task. Rich clients are famously price sensitive—and providing the high-touch service they expect is costly. Cutting back on the white-glove service can backfire. “Trust and custody is about the worst oligopoly that has consolidated over time, yet has very little (maybe no) pricing power over its clients,” Evercore ISI analyst Glenn Schorr wrote in a June 23 research note. Schorr is skeptical that Northern Trust is willing to sell.

The biggest hurdles to acquisitions in this rarefied field could be cultural. Case in point: Charles Schwab’s 2000 acquisition of U.S.Trust, then a pillar of the industry. As founder Chuck Schwab recounts in his memoir Invested, at the time the company “wanted to expand into wealth management and evolve away from our discount brokerage.” U.S. Trust, with its wealthy clientele, seemed like a good buy. But the trust company’s business model wasn’t scalable and the two companies were a “mismatch,” Schwab writes. He provides an illustrative example of when U.S. Trust’s leadership invited him to lunch at their offices sometime after the acquisition.

“I think I may have been picturing the cafeteria at our offices in San Francisco and appreciated the chance to pick up on the vibe you can get with employees buzzing around you,” he writes. “What’s the level of energy? How are people interacting? Do they look happy, enthused? But this was a different scene. We sat down to a very formal lunch in their dining room with white linens and fancy table service. It became a metaphor in my mind for the mismatch we had.”  Schwab sold U.S. Trust to Bank of America in 2006, and eventually the brand vanished.

None of which necessarily would stop Robin Vince from snapping up Northern Trust. BNY may well share more in common with Northern Trust than Schwab did with U.S. Trust. And Northern Trust conceivably could warm to a deal. Stranger things have happened in the world of mergers.

–Rebecca Ungarino contributed to this article.

Write to Andrew Welsch at andrew.welsch@barrons.com