Finance: SECURITIES FIRMS
MERRILL MAY BE A MERGER MOGUL AT LAST
It reaches for the elite ranks of M&A with record deals
Apr. 23 will be remembered by investment bankers at Merrill Lynch & Co. for a long time. On that day, Bell Atlantic Corp. officially announced its massive $23 billion merger with Nynex Corp., one of the largest deals in history, and Cisco Systems Inc. agreed to acquire Stratacom Inc. for $4 billion. In a clean sweep, Merrill Lynch served as adviser to both Bell Atlantic and Cisco. On the 30th floor of Merrill Lynch's Manhattan headquarters, where its mergers and acquisitions department is based, the mood was euphoric. "We have gotten to the promised land," jokes Jack Levy, co-head of M&A at Merrill.
For well over a decade, the giant brokerage has been pursuing an almost obsessive campaign to join the elite ranks of Goldman, Sachs & Co. and Morgan Stanley & Co. as kings of M&A, the most upscale business on Wall Street. Yet one Merrill executive after another has tried and failed to put the firm on the map in M&A. "It's a burning objective of theirs," says William Benedetto, chairman of Benedetto, Gartland & Green Inc., an investment banking boutique. The huge Bell Atlantic deal suggests that Merrill's strategy may now be paying off. In domestic M&A, Merrill has gone from No.6 in 1990 to No.1 so far in 1996, and to No.2 in global M&A behind Morgan Stanley (table, page 136). "We want to be first, second, or third in M&A every year," says Tom W. Davis, co-head of investment banking. "We want to be the same as Morgan Stanley and Goldman Sachs mr better."
Bell Atlantic isn't the only blue-chip client Merrill has picked up lately. Ingersoll-Rand Co. used the firm in its $1.5 billion hostile acquisition of Clark Equipment Co. in May, 1995. Merrill beat out four other major firms. Says Thomas McBride, Ingersoll's chief financial officer: "Quite frankly, our management team was more favorably impressed with Merrill Lynch."
Merrill Lynch, of course, has long been the largest and most profitable brokerage house on Wall Street. And it has built a formidable reputation--but for brawn, not brains. Its huge brokerage network has an unsurpassed ability to market securities offerings to investors. It has a leading position in almost every financial market from junk bonds to Japanese yen. Yet Merrill has never been a major player in M&A, which is considered the more intellectual, even glamorous side of investment banking. M&A is regarded on the Street as a much more prestigious undertaking than retail brokerage and even underwriting. Since it involves the structuring of highly complex deals, M&A requires the most creative brainpower. And it forges intimate and lasting ties between investment bankers and clients, since the future of a company can be at stake. "It's been very frustrating for our people for a long time," says Merrill Lynch President David H. Komansky. "We want to be as well recognized for our intellectual capacity as for our physical prowess on the distribution side."
MODEST PROGRESS. While many firms have tried to build an investment-bank and M&A team from scratch, very few have succeeded. In the past decade, losers in the U.S. have included the big Japanese securities firms and Britain's S.G. Warburg & Co. More recently, Union Bank of Switzerland, Deutsche Bank, and Smith Barney have spent lavishly to hire bankers from other firms to try to catapult into the top ranks of investment bankers in a few years. So far, they have made only modest progress. The Merrill story shows that success can take decades, not years.
Merrill's M&A march dates back to the late 1970s, when Merrill Lynch was nowhere in M&A and a second-tier player in investment banking. The firm began its climb in 1978 by buying White, Weld & Co., a small investment bank with an M&A department. Its main approach was to work its way up from the bottom of the investment banking food chain, issuing commercial paper for a company and gradually advancing to more and more complex assignments. It also began using the sheer heft of its balance sheet. By making bridge loans to clients such as Time Warner Inc., it garnered M&A assignments from those same clients. And it boosted its market share by advising its own leveraged buyout arm, Merrill Lynch Capital Partners, for example, on its $5 billion purchase of Borg-Warner Security Corp.
HIRING BINGE. By 1988, Merrill was ranked No.1 in equity and debt underwriting, a position it has maintained every year since then. Building on this strength, Merrill bankers intensified its push into M&A. "We relied on our capital-markets presence to clear the path for penetration in the advisory biz," says Merrill's Levy. By 1993, Merrill had built a reputation as a capital-markets powerhouse. But it still hadn't made much headway in M&A because it lacked a strong bench of M&A bankers and the organization to pursue corporate clients.
To remedy this, it hired an experienced CS First Boston banker, Michael S. Koeneke, to be co-head of M&A with Levy. Koeneke began a marketing effort focused on big corporations and organized by industry group. And in 1993 and 1994, Koeneke and Levy hired some 15 bankers from Wasserstein Perella, Kidder Peabody, and Salomon Brothers, as well as a team of 10 energy bankers from CS First Boston. "Of the senior people in the department, 75% joined in the last three years," says one Merrill banker who came from Salomon Brothers Inc. Merrill says its hiring binge differed from the hiring its competitors are doing. "We're adding people into an existing culture," says Barry S. Friedberg, chairman, investment banking. With the exception of the energy group, "they are integrated into existing groups."
In building its M&A prowess, money was no object. In 1995, Merrill spent $800 million to buy Britain's Smith New Court, in part to gain M&A stature in Europe. While the firm won't say what it has spent over the years, its strategy is a pricey one. Levy says the firm provides clients with reams of research and analysis and armies of bankers to distinguish itself from competitors. Merrill also won't say what its M&A department earns. But insiders say its revenues have grown 40% annually for the past three years and were $300 million in 1995.
These initiatives are now bearing fruit. The Bell Atlantic coup resulted from the efforts of Thomas Middleton, a telecommunications banker recruited from Salomon, and a team of about 15 Merrill bankers. Middleton had a relationship with Bell Atlantic as a junior banker on its failed bid for Tele-Communications Inc. in 1993. The Merrill team pursued Bell Atlantic persistently for two years and, in April, its efforts paid off. Instead of turning to its historic bankers, Bell Atlantic hired Merrill and Middleton.
Several other factors helped Merrill. It is always easier to gain market share when business is booming, like the M&A business has been since 1993. "This is the greatest M&A market in the history of the world," says Koeneke. Merrill has also been greatly aided by the travails of some of its competitors. Salomon Brothers, Lehman Brothers, and even CS First Boston have had trouble holding on to their M&A market share because of personnel turmoil.
"NO INFERIORITY COMPLEX." While Merrill leads the pack in domestic M&A so far this year, that stemmed mainly from the huge Bell Atlantic deal. It will have to work hard to maintain its position. In 1995, Morgan Stanley had 28% in domestic M&A market share, Goldman had 22%, and First Boston had 16.5%. Merrill was fourth, with 15.8%. "I hadn't noticed that they were more prominent today than they had been," says one M&A head at a competitor. "I'm more worried about J.P. Morgan."
For all its progress, Merrill, a firm that is run by two former retail brokers, still doesn't enjoy Morgan's and Goldman's upper-crust client list and august cachet, say former Merrill bankers. "They are still not the firm of choice for the top 500 companies, where getting business is mostly driven by the prestige of hiring Morgan Stanley, Goldman Sachs, or Lazard Freres," says a former Merrill banker.
Merrill bankers privately acknowledge this point, but not for the record. Komansky insists he has "no inferiority complex about our position in the market." But he does admit he is not satisfied with where Merrill is today in M&A: "We want to have the respect and stature and ability in the advisory practices that we have in the other businesses we're in." In a business in which the rise or fall of firms is often measured in decades, that could still take a while. But it would be a mistake to bet against Wall Street's most determined bull.By Leah Nathans Spiro in New YorkReturn to top