WALL STREET JOURNAL

 

Merrill Buys First Republic
To Beef Up Banking Services

By ANDREW DOWELL and DAVID ENRICH
January 30, 2007; Page C5

Merrill Lynch & Co. is moving to bolster its brokerage business serving individual investors.

Its agreement to buy First Republic Bank of San Francisco for about $1.8 billion in cash and stock not only gives the brokerage firm an established private-banking firm focused on wealthy investors, but also a commercial bank with 43 branches that makes business and mortgage loans.

Robert McCann, head of Merrill's private-client brokers, said Merrill plans to keep the First Republic name and open new bank branches in cities where it lacks a presence. But he said Merrill doesn't plan to enter mass-market banking with branches blanketing cities.

[R M]The plan helps address Merrill Chief Executive Stanley O'Neal's concern that Merrill needs more significant banking capabilities -- in particular, the ability to provide loans and deposit products to small business owners -- to stay competitive in wealth management.

Merrill's offer represents a 44% premium to First Republic's Friday closing price of $38.30. It will be paid half in cash and half in stock, but has a fixed value of $55 a share. The companies expect the deal to close in the third quarter.

Analysts said the price tag appeared to be steep, especially considering that First Republic's profits are expected to grow relatively slowly over the next two years. Amid such concerns, First Republic's shares jumped 40%, or $15.33, to $53.63 in 4 p.m. New York Stock Exchange composite trading, while Merrill shares fell 2.3%, or $2.14, to $92.39.

Merrill expects the purchase will add modestly to earnings by the end of 2008. Its higher credit rating should lower First Republic's financing costs, Mr. McCann said. The companies also intend to boost revenue by cross-selling products to each other's customers.

In his first four years as CEO, all but two of Mr. O'Neal's 30 acquisitions were done to fill gaps in the firm's largest business, institutional securities. Although Merrill ranks No. 1 among major firms in per-broker client assets and revenue, Mr. McCann said the latest deal signals Merrill is "not satisfied" with merely preserving the status quo there either.

Merrill has long been thought to be interested in acquiring a commercial bank to plug gaps in its "retail," or individual investor, brokerage operation, which lacks significant lending and deposit services.

With First Republic, Merrill gains a business that includes commercial and construction lending, as well as personal loans and mortgages for expensive homes. On the deposit side, First Republic offers money-market accounts, federally insured bank accounts, checking accounts and certificates of deposit.

But in addition to the hefty price, the deal carries risks for Merrill, which earlier this month acquired a subprime mortgage business, First Franklin, from National City Corp. "This is the second high-profile acquisition that Merrill has made into a business that seems to be on the edge of a decline," said Richard X. Bove, a Punk Ziegel analyst. "Branch banking is peaking, just as the subprime mortgage sector is."

First Republic has offices in Silicon Valley; Los Angeles; Newport Beach, Calif.; Las Vegas; Seattle; and New York. It had total assets of $10.7 billion as of Sept. 30. Jim Herbert, 62 years old, will remain First Republic's chairman, president and chief executive.

--Randall Smith contributed to this article.

Write to Andrew Dowell at andrew.dowell@dowjones.com1 and David Enrich at david.enrich@dowjones.com2