A Jolly Good Deal For Merrill Lynch

Buying Mercury greatly boosts its global position against rivals

The deal caught London completely off guard. Merrill Lynch & Co. announced on Nov. 19 that it would buy Mercury Asset Management Group PLC for $5.3 billion. But the marriage of the largest American brokerage firm with the Rolls Royce of British money managers makes a lot of sense. The deal will give Merrill nondollar-denominated funds to sell in Europe and will beef up its institutional fund-management business. It also will provide entree into Europe's fledgling defined-contribution business. But most important, the acquisition will help Merrill shore up its position in the race against such rivals as Goldman, Sachs & Co. and Morgan Stanley, Dean Witter, Discover & Co. to rule global financial markets. "We believe that in the near future, our industry will be dominated by a handful of firms," says Merrill's CEO David H. Komansky. "This will help ensure our place as a global leader."

Merrill plans to use Mercury as a global platform both to expand internationally and develop new products for the hungry U.S. market. For example, Mercury managers will develop new country funds for Merrill brokers to sell to their customers. Merrill also will use the Mercury name and network to make inroads in Europe and the Far East.

This latest deal is just one of many sweeping Europe's financial industry. With monetary union only two years away, firms are positioning themselves to be regional players in a financial market many believe will eventually rival that of the U.S. European banks and insurance companies are consolidating across borders. U.S. firms also are positioning themselves to be big players in the new euro game. Merrill is attracted by Mercury's strong position in London, where it manages about $120 billion for institutions, as well as by its beachheads in Germany and The Netherlands.

The tie-up also looks good for Mercury, which was until 1995 the asset-management arm of the venerable investment bank S.G. Warburg & Co. Mercury had been looking to expand internationally, especially into the U.S. It had talked with dozens of potential partners by the time Merrill, a long-standing business ally, began cozying up last summer. But it was only in the past two weeks that Mercury and Merrill started talking turkey. "People were always asking us how we were going to distribute our products in the U.S.," says Mercury Chairman Hugh A. Stevenson, who attended a London press conference along with Merrill's President Herbert H. Allison and International Deputy Chairman Michael J.P. Marks, and Mercury Finance Director David Causer, to announce the deal. "Now, we have the answer."

Mercury is also getting a very nice price--a 31.7% premium and 25 times the past 12 months' earnings. Mercury's shrewd managers may have foreseen that the market for financial mergers might be nearing a top. Indeed, Stevenson, along with Vice-Chairman Carol Galley and Deputy Chairman Stephen A. Zimmerman, will collect a total of $21 million from the all-cash deal.

ONE OF A KIND. Zimmerman and Galley, the most prominent woman in London's financial community, plan to stay on to run Merrill's institutional fund-management business from Mercury's London headquarters. They also will join Merrill's executive-management committee. Merrill saw the deal as a one-of-a-kind opportunity to boost its fee-based businesses. Mercury adds about $170 billion in funds under management, bringing Merrill's total to about $450 billion. That places it third globally, behind Fidelity Investments and France's Axa-UAP. To reassure clients, as well as Mercury management, Merrill promises not to interfere in investment decisions.

Still, the new firm may have to scramble to keep all its institutional clients. Mercury has had some bad publicity recently. Its premier British-pooled equity fund has been an industry laggard, ranking 67th out of the 71 funds tracked by Combined Actuarial Performance Services Ltd.

Merrill apparently has shrugged off such details. Just a few years ago, acquiring London investment banks was the rage. Now, such operations are hard to sell. Instead, global players such as Merrill prefer the more lucrative asset-management businesses. Anticipating future bids, shares of other firms including Schroders, M&G Group, and Perpetual all rose sharply on Nov. 19. The value of National Westminster Bank's Gartmore asset-management subsidiary has also doubtless risen should it want to sell. With the world population aging and social security systems flagging, the big financial institutions want all the mutual funds they can get under their roofs.

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