NEW YORK (Reuters) — Bank of New York Co. said yesterday it will buy Mellon Financial Corp. for $16.5 billion, combining two storied names in American finance to create a powerhouse in asset management and custody services for institutional investors.The combined company, to be called Bank of New York Mellon Corp., will rank first worldwide with $16.6 trillion of assets under custody. It will rank tenth in asset management and ninth in wealth management, overseeing more than $1.1 trillion of assets.

About 3,900 of a combined 40,000 jobs will be eliminated over three years to help save $700 million, or 8.5 percent of costs, by 2010. Restructuring charges will total $805 million after taxes. Annual revenue will total about $12.5 billion.

“It is a complementary combination that, with strong leadership, could produce above-average earnings growth,” said Gerard Cassidy, an RBC Capital Markets analyst, who rates both companies “neutral.”

In early trading, Mellon shares rose $1.99, or 5.0 percent, to $42.04, while Bank of New York rose $3.42, or 9.6 percent, to $38.90.

Bank of New York shareholders will own 63 percent of the new company. They will get 0.9434 of a share and Mellon shareholders will get one share for each of their shares. Bank of New York will designate ten of the company’s 18 directors.

The combined company will be based in New York, but expects to keep cash management and stock transfer units in Pittsburgh, where Mellon is based.

Both companies have similar business models, and have over time shed banking operations in favour of fee-based businesses. Mellon’s units include the Dreyfus mutual funds.

The new company will generate about 29 percent of revenue from asset and private wealth management, 28 percent from asset servicing, 20 percent from treasury and clearing services and 18 percent from issuer services.

Robert Kelly, Mellon’s chief executive since February, will retain that position, while Bank of New York chief executive Thomas Renyi will become executive chairman for 18 months after the closing, expected around July 1, 2007.

Renyi will oversee the integration. He called the transaction a “transformational merger,” amid a push among many financial services companies to add scale and cut costs.

“Their businesses tend to be scale businesses (that) benefit from size,” said Richard Bove, an analyst at Punk Ziegel & Co.

Bank of New York expects the merger to reduce earnings in 2007 and add to them in 2008, while Mellon expects a boost in 2007. The companies expect a 19 percent internal rate of return.

Founded in 1869, Mellon was known for helping finance the growth of the U.S. steel industry. Andrew Mellon, the financier, took over the company in 1882 when his father Thomas retired, and later served as US Treasury Secretary.

Bank of New York was founded in 1784 by Alexander Hamilton, later the first Treasury Secretary.

In 1998, Mellon rebuffed an unsolicited $24 billion takeover bid by Bank of New York, which Renyi led at the time.

Renyi said he approached Kelly in late September after the latter expressed interest in buying an asset manager.

Kelly said he called Pittsburgh Mayor Luke Ravenstahl, Pennsylvania Governor Edward Rendell and other government leaders to discuss the merger’s impact on Pittsburgh.

He said “we are committed to creating 1,000 to 2,000 jobs in the city”, and that “because of Mellon’s historical importance, we unilaterally understood the advantages to a Pittsburgh location”, including lower labour costs.

The merger would leave Northern Trust Corp. and State Street Corp. the only big rivals in securities servicing. Their shares rose about four percent in early trading.

Cassidy said both could win market share from investors who don’t want to funnel business to a single company. “I don’t see pressure on either to combine,” he said.

Bank of New York in October swapped its branch network for JPMorgan Chase & Co.’s corporate trust business.

“Bank of New York will be undergoing two major integrations at one time,” Cassidy said. “That’s an armful for anyone.”

Goldman Sachs and the law firm Sullivan & Cromwell LLP advised Bank of New York. UBS, Lazard and the law firms Simpson Thacher & Bartlett LLP and Reed Smith LLP advised Mellon.

Bank of New York has a hedge fund administration business in Bermuda.