Merrill's Big Banking Bet

The financial services giant's $1.8 billion deal to acquire First Republic is part of a push to snag more high net worth customers

Merrill Lynch (MER) is gunning for more business with the rich. The New York financial services giant announced plans on Jan. 29 to spend $1.8 billion to acquire First Republic Bank (FRC), whose clients include people like the drugstore chain Duane Reade's CEO Anthony Cuti and the actress-director Penny Marshall.

"First Republic will enable Merrill Lynch to accelerate its strategic objective of growing its high net worth business," said Robert J. McCann, President of Merrill Lynch's Global Private Client business, in a press release Jan. 29.

First Republic is a private banking and wealth management firm that specializes in luxury home lending. On loans originated over the past 10 years, it has incurred less than one and a half basis points of cumulative net loan losses. "Its high quality client service model has proven very successful," Merrill said in its release.

Investors have been putting the heat in recent months on those who sell loans to high-risk borrowers -- mainly lower-income people -- after low interest rates during the 1990s spurred on a frenzy of home buying in the U.S. that has only recently begun to cool. In one recent example, investors sold most mortgage lender stocks on Jan. 16 when the savings, loan, and mortgage originator Indymac Bancorp (NDE) warned about deteriorating mortgage industry conditions during the fourth quarter. But First Republic shares only slipped 0.8% in value on that day, according to Yahoo, compared to a 3.8% drop for the subprime lender Countrywide Financial (CFC) and a 7% plunge for Indymac.

As a combined entity, First Republic and Merrill Lynch expect to enhance their revenue and earnings growth by cross-selling their products and services. They also plan to expand First Republic's offices, among other things. Merrill thinks the deal will begin to grow its earnings by the end of 2008.

Jim Herbert and Katherine August-deWilde will continue in their roles as CEO and COO, respectively, of First Republic Bank. They expect to keep operating their business separately as a new division of Merrill Lynch Bank & Trust Co.

Under the agreement, First Republic shareholders get $55.00 per share and can choose payment in cash or Merrill Lynch stock. Investors bid up First Republic’s stock more than 40% to $53.65 per share in early trading on the New York Stock Exchange. Merrill fell 1.3% to $93.30 per share.

Standard & Poor's Corp. analyst Matthew Albrecht expects the deal, which remains subject to regulatory approval and a vote by First Republic shareholders, to close in the third quarter of 2007. (S&P, like, is owned by The McGraw-Hill Companies.) Albrecht kept a strong buy opinion on Merrill's stock and a 12-month target price of $114 per share.

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