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Merrill Lynch to Buy Biggest British Stockbroker For $842 Million

July 21, 1995

NEW YORK (AP) _ Escalating the takeover binge in the British securities industry, Merrill Lynch & Co. Inc. agreed Friday to pay $842 million for Smith New Court PLC in a deal that creates the largest global stockbroker.

Merrill, which bested Germany’s Commerzbank AG after a two-week bidding war, becomes the first big U.S. brokerage to join a feeding frenzy that had been dominated by continental Europe banks.

Merrill’s price for Britain’s No. 1 stockbroker firm ups the ante for a dwindling British industry pool of independent brokerages. The thriving London stock market is No. 3 in the world, behind New York and Tokyo, and Britain is seen as a launching pad for expansion into markets not yet dominated by major world investment banks.

For the global leadership in stocks, Merrill Lynch is paying a steep 2.4 times Smith New Court’s book value.

``I think they are overpaying. They can afford it,″ said Perrin Long, an industry analyst with Brown Brothers Harriman & Co. in New York.

``There is a cost to being No. 1 regardless of where you are in the world, and it’s all part of what Merrill was paying for this firm.″

In two weeks of talks with Smith chairman Michael Marks and other senior managers, Marks and his advisers spent that time ``ringing the last nickel out of us,″ Merrill president and chief operating officer David Komansky told reporters at a New York news conference.

Merrill said the deal would slightly dilute profits this year and next. Its stock was unchanged at $55.12 1/2 per share in late trading on the New York Stock Exchange.

London recently has seen a string of blue-chip investment houses taken over by banks from continental Europe. In May, London’s top investment bank, S.G. Warburg, was bought out by Swiss Bank Corp. for $1.38 billion in cash after a proposal from Wall Street giant Morgan Stanley fell apart.

Merrill and Smith New Court said the combined firm would have the largest stock research team in the world, with about 370 analysts. It would also be the leading underwriter of new stock issues and the largest trader of U.S. and British stocks and U.S. stocks of foreign companies based in Europe, Asia and Latin America.

Previously, S.G. Warburg was No. 1 in total global equity analysts, with 244.

The purchase, subject to approval by regulators and Smith shareholders, speeds an already intense consolidation of the global securities industry.

As traders and investors have demanded the ability to easily buy and sell securities from countries around the world, many firms have sought expansion in regions where they lack strength.

Merrill executives said they envision utilizing Smith as a jumping off point for expansion in countries such as South Africa, Malaysia, Thailand and others.

``By combining Merrill Lynch’s global resources with Smith New Court’s experience and relationships in non-U.S. equity markets, we expect to increase our business significantly around the world,″ said Merrill Lynch Chairman and Chief Executive Officer Daniel P. Tully.

Smith New Court directors have agreed to Merrill’s terms, and will recommend the offer to shareholders, the two groups said. The Anglo-French securities firm Rothschild Group has agreed to accept the offer for its 25.9 percent stake in Smith New Court.

The higher-than-expected price reflects competition from other suitors. Smith New Court revealed on July 12 that it was talking to a small number of parties interested in buying the group, which is one of the largest remaining independent stockbrokers in London.

Earlier Friday, Frankfurt-based Commerzbank said it had ended merger talks with Smith New Court, an acknowledgement that its target preferred a union with Merrill. The bank declined to elaborate.

Smith, with total assets of $6.9 billion, is dwarfed by Merrill’s assets of $164 billion.

Merrill already employs 2,000 people in Britain, next to Smith’s staff of 950 in London, leading to market speculation that Merrill would eliminate a significant number of jobs if a purchase deal was signed.

Merrill executives downplayed such talk, saying there won’t be many cuts.

Komansky called the deal ``an expansion, not a consolidation.″

``Each firm brings unique and complementary skills to this union, with minimal duplication,″ he said.

Merrill said it had offered long-term cash and stock incentives to managers of Smith New Court to encourage them to stay.

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