Despite repeated denials by UBS CEO Marcel Ospel, there is persistent speculation that the Zurich-based bank has been preparing a formal takeover bid for Merrill Lynch. Merrill's name has been bandied about in takeover talk for the past few years, with Bank of America, Deutsche Bank and HSBC named as potential suitors.
But Merrill management continues to dismiss all takeover gossip. The rumors were dogging Merrill President Stan O'Neal at a recent conference when he told several hundred retail brokers that the company had begun to “separate itself from its competitors.” In the same speech, O'Neal voiced his belief that neither the growth of the U.S. investment banking community nor Merrill's is based on further consolidation.
What's more, some analysts suggest, Merrill is not the ideal acquisition candidate.
For starters, the firm is looking for a steep premium to the current $36 share price, analysts say. They speculate that Merrill wants $65 a share, or more.
That would be a stretch at a time when the bulge bracket firm has seen client assets decline from a peak of $1.7 trillion in 1999 to about $1.4 trillion today in spite of hundreds of billions of dollars in capital inflows. It has also seen its market share of global investment banking transactions decline from 31.5 percent in 2000 to under 28 percent.
Merrill has been an aggressive cost-cutter. It has reduced the number of financial advisors by roughly 25 percent to 15,000 over two years. It also booked more than $2 billion in one-time charges to account for a host of back-office terminations as well as other costs associated with closing underperforming branch offices. This belt-tightening helped boost pre-tax margins by about 400 basis points (to 19.1 percent) from last year, and should save more than $1 billion annually. That's appealing for the long term, after the market recovers, but not for the present.
What's more, this belt-tightening has a downside. Even bullish analysts such as Reilly Tierney of Fox-Pitt, Kelton and Sanford C. Bernstein's Brad Hintz, have voiced concern that Merrill's cost cuts could hurt its ability to garner investment banking deals and grow private client assets down the road.
Potential litigation also could dampen interest. Earlier this year, Merrill paid a $100 million fine to settle charges that its analysts disseminated overly bullish reports in order to attract lucrative investment banking deals. While the settlement could save the firm from criminal investigation, Merrill could still be the subject of civil suits and arbitrations, says securities attorney Nathan Finch, of Caplin & Drysdale in Washington.
Merrill recently fired two executives who refused to testify about their knowledge of Enron's financial affairs.
In a Sept. 3 research report, Bernstein's Hintz speculates that Standard & Poor's is poised to lower the credit ratings of several high profile brokers, including Merrill's. He points to several factors: A weak IPO calendar, soft M&A numbers, the steepening of the government bond yield curve and widening credit spreads. If this happens, Merrill's cost for commercial paper and other short-term notes will increase.
Considering these hurdles, the consensus among those on both the ‘buy’ and ‘sell’ sides is that Merrill will stick it out alone — for the time being.
