MELLON BANK TO ACQUIRE BUCK

NEW YORK-Ending months of speculation, Buck Consultants Inc. has agreed to be acquired by Pittsburgh-based Mellon Bank Corp., marking the first time a financial services company has bought a major benefit consulting firm.

The planned acquisition of New York-based Buck by the diversified banking giant is intended to create an industry powerhouse in total benefits outsourcing, though some in the industry are questioning how Buck's traditional consulting services will fare under bank ownership.

Buck and Mellon executives announced last week that they had signed a letter of intent for Mellon to purchase Buck for an undisclosed amount of cash and Mellon stock. The announcement came after several weeks of rumors that Buck was talking with Mellon and other financial services firms about an acquisition (BI, Dec. 23/30, 1996).

Buck, which ranked eighth among benefit consulting firms with worldwide gross consulting revenues of approximately $225 million last year (BI, Dec. 9, 1996), is ending 80 years of independence for the chance to seize what it deems an opportunity to better compete against a crowded field of large benefit outsourcing operations.

Mellon, with a large portfolio of mutual funds and growing 401(k) plan administration programs, has balance sheet assets of more than $43 billion.

Buck President and Chief Executive Officer Joseph A. LoCicero emphasized that despite expansion in the company's outsourcing programs, clients would see no immediate large-scale changes in Buck services and that executive leadership and staff would remain largely intact. Buck, as a new Mellon subsidiary, would continue to operate under its present name and be directed by the present executive team, though some Mellon representatives will be added to the Buck board of directors.

Mr. LoCicero has previously said it is necessary for Buck to gain access to the deep pockets of a large parent company to remain competitive.

Mr. LoCicero said he will remain president and CEO of Buck, and that Buck's 2,500 employees "should feel very secure" about their jobs. None of Buck's 65 offices will be closed, he said, and the headquarters will remain in New York.

Mr. LoCicero also will become a member of Mellon's senior management committee.

The "vast majority" of Buck employees are expected to stay with the firm, said W. Keith Smith, vice chairman of Mellon Bank Corp.

More than 300 Buck principals who are shareholders of the closely held, employee-owned firm will vote on the sale, and a definitive agreement is expected in about a month, Mr. LoCicero said. The deal is expected to close in the second quarter, he said.

The Buck principals will be offered either cash or Mellon stock for the sale, which Mellon is paying for out of cash on hand, a spokesman said.

Messrs. LoCicero and Smith said the deal makes sense because while Buck needs a greater capital stream to fuel its outsourcing operation, Mellon is pursuing a closely related goal: expanding its existing 401(k) plan outsourcing program into a total outsourcing initiative that also serves defined benefit plans and health and welfare plans.

A Mellon subsidiary, Dreyfus Retirement Services, in 1995 began offering investment products and administrative services to defined contribution plans, including 401(k), 401(a) and 403(b) plans, and generated $2 billion in assets that year. Mellon manages mutual funds for institutional clients in more than 50 countries.

Mellon determined that absorbing Buck's existing outsourcing facilities and expertise would be the most direct route to offering total outsourcing, Mr. Smith said. It will be simpler than hiring its own actuarial experts and other specialists, he said.

"We concluded it would be much quicker and much more effective to do this as a merger, as we are," he said. "If you're going to be in the (outsourcing) business without acquiring someone like Buck, you have to hire someone like Buck to your organization."

Buck might not be able to succeed in the outsourcing field without Mellon's assistance, Mr. LoCicero said. "We weren't sure we were going to be able to accomplish that, but with Mellon we'll accomplish that," he said. "We're excited about the resources Mellon brings to us. We believe this is a win-win situation for all parties involved."

Outsourcing represents about 25% to 30% of total revenues for Buck at present, Mr. LoCicero said.

Joining with Mellon will enable a new, integrated total outsourcing system to be set up this year, he said. A new configuration of outsourcing service centers will allow defined benefit, defined contribution and health and welfare plans to be serviced by a sole data base, whereas several data bases currently are used. The more streamlined and centralized system will make outsourcing a simpler process for plan sponsors, many of which are now using more than one contractor for various outsourcing tasks, he said.

Helping Buck to grow will eventually push the benefit consultant into the front row of those companies now vying for outsourcing clients, including such competitors as Lincolnshire, Ill.-based Hewitt Associates L.L.C. and Bethesda, Md.-based Watson Wyatt Worldwide, according to Mr. Smith.

"It's very clear to us it can be profitable to us, if we do it well," he said. And while he acknowledged there is risk inherent in all new ventures, Mr. Smith said he is confident the purchase "will make us an outsourcing leader."

The outright purchase of a benefit consulting firm by a bank is unprecedented, but it may make sense to both sides in this case, said A.W. "Pete" Smith, president and chief executive officer of Watson Wyatt. "If Buck wanted to be successful in this area, they had to be" acquired, said the Watson Wyatt CEO.

Wyatt took a similar course to Buck's in December 1995, when it agreed with State Street Boston Corp., a large servicer and manager of financial assets, to form a joint outsourcing company. The company was eventually named Wellspring Resources and, like Mellon's purchase of Buck, was designed to bring disparate benefits information into a common data base and attract customers seeking total outsourcing. The alliance was forged despite Wyatt's already having built a Florida-based outsourcing program that was managing benefits for 3 million workers, dependents and retirees.

On the other hand, the prospect of a bank owning the consulting side of the business may be troubling to clients, said Watson Wyatt's Mr. Smith.

"On the consulting side, I'm less sanguine about the opportunity to create value," he said, questioning if clients will wonder if the firm is truly independent from its parent in its analysis. He also questioned if Buck as a subsidiary would come under new pressure to earn increased profits for its parent, and how that would affect consultants.

Mr. LoCicero said that Buck's consultants would remain fully independent from Mellon as a condition of the deal and that doubts to the contrary are "typical reactions of competitors."

It is also unclear if clients of consulting firms want banking and benefits consulting services to be available within the same corporation, said Reed Keller, vice chairman of Coopers & Lybrand L.L.P.'s Human Resource Advisory Group in Atlanta. A Buck consulting client may not want to feel obligated to become a Mellon banking client, for example, he said.

"In terms of what the market wants, what the client wants, I'm not sure it necessarily wants all services bundled in one institution," he said. "Time will tell, but it doesn't necessarily seem like that's a real advantage."

Mr. LoCicero countered that because Buck would ensure that its consulting services remained independent of Mellon, clients would never be faced with the necessity of bundling their business together. Buck expects no loss in clients as a result of the acquisition, he added.

Ownership by Mellon will undoubtedly give Buck more cash to expand its outsourcing projects, Mr. Keller said.

"Whether that makes them one of the more formidable forces in outsourcing, we'll see," he said.