How Merrill Is Winning The East
It was a marketing nightmare. Just as it unveiled an unprecedented multi- million-dollar regional advertising campaign this summer, Merrill Lynch & Co.'s star private-banking employee in Asia was hauled into a Hong Kong court on a money-laundering charge. Merrill, which has also filed a civil suit against Kevin Wallace in Singapore, was forced to swallow a painful $45 million charge against second-quarter earnings. Much to its consternation, Merrill found its ads featuring goldfish, a traditional Chinese symbol of prosperity, competing for attention with the Wallace scandal.
Merrill, which maintains that Wallace engaged in unauthorized trading and falsified clients' statements and signatures, says it has compensated customers, launched an internal investigation, and beefed up supervision. Wallace has been released on bail and "will be vigorously defending the charges," says his attorney Sharon A. Ser. But the case has thrown a spotlight on the investment bank's ability to control its employees in the freewheeling Asian terrain.
A big pothole in the road? You bet. But the scandal isn't slowing the firm's advance across Asia. Since the mid-1990s, when Merrill began aggressively expanding across Asia, its revenues and earnings in the region have soared. "Asia clearly will be one of the two or three engines of economic growth," says CEO David H. Komansky. Building a powerhouse in some of the world's fastest-growing economies is an important part of Komansky's strategy to make non-U.S. revenues--currently about 25%--account for more than half of Merrill's business in five years (table). "He has a personal and strategic interest in Asia," says Eugene H.J. Bang, an ex-Merrill banker and a director at Korea's Dongsuh Securities Co.
The stakes in Asia are high, even for a company that earned nearly $1 billion worldwide in the first half of 1997. Asia gives Merrill a huge source of potential clients in a region where growth rates have been triple those of the West for a decade. Already, Merrill boasts one of Asia's biggest brokerage networks in the region, a burgeoning asset-management arm, and is the leading debt underwriter and a powerful force in equities. This will give it a strong position against such Wall Street rivals as Morgan Stanley, Dean Witter, Discover, Salomon Brothers, and Goldman Sachs that have chosen narrower niches in the region.
BULKING UP. It was the 1995 acquisition of London-based global broker Smith New Court PLC that put Merrill on the map in Asia, where it long trailed its U.S. competitors. The purchase gave it stock-exchange seats and highly regarded local research teams. Since then, Merrill has bought one of Australia's top brokerages, McIntosh Securities Ltd., and more than tripled its regional staff outside Japan to 2,000-plus, compared with 800 for Morgan Stanley and 450 for Goldman. Merrill has also beefed up its mergers-and-acquisitions and research units, and is distributing mutual funds through Korea's LG Securities and India's DSP Merrill Lynch Securities Ltd. "These are really long-term commitments," says John S. Wadsworth Jr., who heads Morgan Stanley's Asian operations. "Merrill's advantage is its significant local presence."
The rapid-fire expansion is paying off. Merrill's pretax earnings for the Asian region, which includes Japan and Australia, more than doubled, to $199 million in 1996, as revenues jumped 25%, to $1.5 billion. Asian business outside Japan accounts for about half of those earnings and equals the profits of its two strongest Asian rivals, Jardine Fleming and Peregrine Investment Holdings Ltd. This year, Merrill's Asian pretax profits are expected to hit $200 million. Merrill's internal targets call for roughly a doubling of revenues every year for the next three years, matched by a similar climb in profits.
But Merrill still faces formidable challenges. One worry now is currency-market turmoil that has been sending Asian stocks plummeting and may slow the flow of new deals. By staying the course, Merrill could disprove the long-held notion that U.S. investment banks are willing to cut and run from Asia at the first sign of trouble.
There are other obstacles. Protectionist restrictions in such markets as India, Indonesia, and Malaysia have forced Merrill to link up with local partners, diluting its fees and undercutting its control. Merrill also has struggled to hold local talent. Nearly all its top positions are held by American, Australian, and British executives, fueling resentment that the firm isn't committed to promoting Asians. One big loss was Liping Zhang, a U.S.-trained Shanghai native who built up Merrill's Chinese corporate-finance arm and then quit two years ago to head Seapower Financial Services Group, a Chinese-backed securities firm in Hong Kong. Peter Clarke, chairman of Merrill Lynch (Asia Pacific) Ltd., concedes "frustration" at the level of employee turnover and says a revolving door "is no way to run a business, especially in Asia, where relationships are everything."
BOND BONANZA. Despite these challenges, Merrill is gobbling up market share. Thanks to its its huge U.S. client base, Merrill raised $3.3 billion in the public debt market in Asia during the first half, almost as much as second- and third-ranked Morgan Stanley and Salomon combined. In July, it raised $2 billion for Hong Kong conglomerate Cheung Kong Holdings Ltd., in one of Asia's biggest and most successful bond deals ever. It also is expected to float a $500 million bond issue for the Chinese government in September and was sole underwriter for a $100 million bond offering for China's Fujian province. Merrill has also sold $1.1 billion in Asian equity deals outside Japan in the first half. In addition, it won a hotly contested privatization deal for Indian telecom giant MTNL. "They are a machine," observes a rival U.S. investment banker.
Merrill's deep pockets are helping it win some of its biggest prizes. For example, when the Federal Reserve raised interest rates during a landmark $1 billion Chinese government bond deal in 1994, Merrill stood its ground. Instead of dumping the bonds on the market and driving prices down even further, it kept the paper on its books until the market improved, suffering a $15 million loss. The effort paid off: A grateful Chinese Ministry of Finance awarded Merrill two other bond deals. Indeed, Merrill is willing to slash prices to win deals. Not long ago, it cut its underwriting fee from 3% to 2.75% to win a coveted $300 million global depository share deal for South Korea's Kookmin Bank last year.
To be sure, Merrill trails Morgan Stanley and Goldman in China equity deals, and has handled virtually none of the initial purchase offerings by Chinese-owned red-chip companies that drove the Hong Kong market to record highs earlier this summer. Nonetheless, Merrill has won a mandate to privatize many of the assets of the city of Tianjin. And even as it is being forced to play catch-up in equities, it is pushing hard to woo retail investors.
Although the Wallace fiasco tarnished the image of the private-banking unit, Merrill is going ahead with plans to expand offices catering to affluent Asians in Los Angeles, Sydney, and cities in Asia. One special target: politically connected and very rich entrepreneurs, especially in Indonesia. The focus on Asian nouveaux riches is understandable. Average Asian private-client accounts are traditionally three times as large as those in the U.S. Singapore-based private-banking head Raymundo Yu figures that his unit's five consecutive years of 20% annual growth in assets under management will continue "for the foreseeable future" and that Asia will outstrip North America in assets under management by 2000. Assets in the super-rich category of $30 million and up are increasing the fastest.
With this wealth of opportunity, it's no wonder Komansky is an avid Asiaphile. In the chairman's office hangs a huge Gurkha dagger and a set of 2,500-year-old bronze arrowheads from China's Warring States, symbols, perhaps, of this firm's self-proclaimed readiness for battle.