Revamp Linked to Mellon Unit's Wilting Margins

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Mellon Financial Corp.'s reorganization of its equity asset management unit this week is an effort to draw profits from a series of expansions that have produced less than stellar results, analysts said.

"Mellon's margins and its institutional money management business have been subpar," said Henry McVey, an analyst at Morgan Stanley who covers Mellon. "That is a significant drag on their stock. This decision to reorganize makes sense. Management is focused on improving its profit margins."

The Pittsburgh banking company's institutional asset management profit margin fell from 28% in 2001 to 13% last year, a company spokesman said. In an effort to resuscitate profits, Mellon is aligning its entire equity group under its best-known name in the segment, value manager Boston Company Asset Management. When the reorganization is completed, the equity group of Standish Mellon Asset Management and the large-cap growth team of Mellon Growth Advisors will have moved onto the Boston Company's platform.

"Achieving investment outperformance is becoming harder and harder," said Ronald P. O'Hanley, the president of Mellon Institutional Asset Management. "Those that will win will have a broad and deep commitment to equity research. By bringing these units together, we will have one of the largest research departments on the buy side," with 31 equity analysts.

Mellon bought Standish, Ayer & Wood, a Boston bond manager, in April 2001. In July that year, Mellon Growth hired a team of equity managers from State Street Corp. to handle large-cap growth. Standish Mellon manages $1.7 billion of equity assets and Mellon Growth manages $1.1 billion.

Boston Company will manage $24 billion of equity assets once the reorganization is complete. Mellon Institutional Asset Management manages $322 billion of assets in equity, bond, fixed-income, and money management funds.

Mr. McVey said Mellon wants to find the right combination for its asset management units. "Mellon is a unique organization in that their asset management company is the combination of several asset management acquisitions," he said. "Their path is different (from that of) a firm that grew organically."

In January, Mellon announced it was merging three of its 14 fixed-income institutional asset management units to boost cross-selling. …