The Bank of America-Merrill Lynch combine is forecasting $7 billion of pre-tax cost savings over the next four years, representing 10% of the annualised expense base of the merged entity. What does this mean for Merrill's people in Asia?
On a post-merger call posted on www.seekingalpha.com, Bank of America CFO Joe Price presented the $7 billion cost reduction forecast to analysts, saying: "The savings would be centred in the areas you would expect with headcount reductions across both platforms including overlap and back office and support functions and processes, as well as vendor leverage."
When pressed by analysts that the forecast cost savings seem very high, Price said BoA intends to be "very aggressive on the cost side or the efficiency side".
Some specialists assume this will mean rounds of job cuts. Assuming simplistically that the 10% reduction in the salaries and wages is effected by cutting the same number of employees, this translates to 27,000 job cuts globally (Bank of America currently has 210,000 employees, Merrill Lynch has 60,000). Obviously, given that salaries are only one element of costs, and further that salaries don't work on simple averages, the real numbers could be vastly different. But the fact remains that some rationalisation of staff seems likely.
Merrill has around 4,000 employees in Asia ex-Japan and another 1,500 in Japan, in total representing only 7.5% of Merrill's worldwide headcount. One question doing the rounds is how many people in Asia will be deemed to "overlap"?
The prevailing opinion on the street is that Asia seems better placed than a number of other regions because the duplication between BoA and Merrill Lynch is far less.
"I would be more concerned about Merrill Lynch employees if the firm was being acquired by HSBC, because there would definitely be a lot more job cuts," says one source who suggests the minimal overlap between the two firm's businesses in Asia will be a factor limiting job cuts in the region.
BoA's keen desire to build a global presence specifically in investment banking and wealth management—areas that BoA CEO Kenneth Lewis has maintained are driving the deal—corroborate that most Merrill bankers in the region should find a home in the new combined structure. BoA's existing business in the region is largely retail and corporate banking focused.
Asia was home to some of the world's fastest-growing markets for high-net-worth individuals in 2007, taking five spots out of the global top 10 for the third consecutive year, according to the 12th annual World Wealth Report released by Merrill Lynch and consulting firm Capgemini earlier this year. India was the world's fastest growing HNWI market followed by China.
Merrill has recognised the opportunity to capture private banking revenues in Asia and has invested time and resources to build a team to service the demands of this market. It has hired a slew of people from rivals such as Citi to build its presence and win clients. BoA is likely to value this team, which is now entrenched across a number of countries in Asia.
With regard to investment banking, BoA has tried unsuccessfully to grow organically in Asia in the past. In 2001 BoA shut down its investment banking business in Asia, a decision which affected 55 staff in Mumbai, Hong Kong and Singapore. In India, BoA had been successful in building a team of 12 people since it launched investment banking in 1997 and was in the midst of executing a pipeline of deals. The team was an attractive enough asset that ING Barings hired them en masse when BoA shut shop.
In 2004 BoA tried again to build an investment banking business, this time primarily in the US. In late 2007 it acknowledged that it had not been able to make significant strides in the business and started winding it down.
But investment banking in Asia is increasingly becoming a balance sheet game as companies in the region expect their advisers to finance their growth ambitions, which in the current environment can be difficult for firms without large balance sheets and holding power. Employees of Merrill Lynch's India subsidiary DSP Merrill Lynch have expressed optimism that BoA could be just the fillip their business needs. Citi has been very successful in investment banking in India, partly because of the willingness of the US bank to lend balance sheet to clients. DSP Merrill, which is already in a top five position in investment banking in India in most products, is hoping the competitive advantages they gain post-merger will move them to pole position.
Whatever the case, the integration of Asia does not seem to be around the corner. When Royal Bank of Scotland acquired ABN AMRO in 2007, it focused first on integrating Europe and then turned towards Asia. In this case, the order is likely to be the US, Europe and then Asia. And maybe by the time BoA focuses its attention eastwards, financial markets everywhere will be showing some signs of recovery.