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U.S. brokers on defensive
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August 15, 2001: 9:15 a.m. ET
Merrill Lynch faces challenge to No. 3 spot; Europeans could be prowling
A Weekly Column by Staff Writer Luisa Beltran
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NEW YORK (CNNfn) - Wall Street investment banks look like they are weathering the economic downturn but their lower profits and falling stock prices mean European bankers could be hovering once again.
Earnings of top U.S. investment banks dove in the second quarter, and outlook for the third quarter isn't expected to be any better. The soft investment banking sector means companies such as Goldman Sachs Group, Morgan Stanley and Merrill Lynch may be ripe for consolidation.
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Luisa Beltran
covers mergers and IPOs for CNNfn.com | |
"This is a tough quarter for everyone," analyst Joan Solotar of Credit Suisse First Boston said. "The fixed-income part of the business did better than equities."
The top three — Goldman, Morgan and Merrill — face major competition from the likes of Lehman Brothers, Bear Stearns and Credit Suisse First Boston, which has knocked Merrill out of the top three in the ranking of merger and acquisition advisors, according to Thomson Financial Securities Data.
Of the trio, only Merrill Lynch has warned that third-quarter results will miss forecasts. Stanley O'Neal became the heir apparent to Merrill's CEO David Komansky when he was named president and chief operating officer late last month. Komansky doesn't expect to retire until 2004, but a change in CEOs could make the firm more receptive to a merger, analysts said.
Merrill (MER: up $0.19 to $52.90, Research, Estimates) shares, now trading in the $53 range, have dropped nearly 34 percent from their 52-week high of $80 and are the cheapest of the three.
Is Merrill going to sell? The New York-based bank already has been linked with HSBC Holdings PLC, the U.K.'s largest bank, a deal that Komansky reportedly has mentioned. But a sale won't come soon, analysts said, and if it does it likely will be a cross-border deal.
The bank still is holding on to third place among investment banks. "Merrill Lynch is still quite profitable in a very tough year," Mark Constant of Lehman Brothers said.
"Merrill is not going to merge with anyone in the near future," added analyst Diane Glossman of UBS Warburg.
Merrill Lynch declined to comment.
A Euro trend
The financial services industry saw a spate of mergers last year involving European heavyweights. Last summer, Switzerland's UBS AG, the third-largest bank in Europe, paid nearly $11 billion for U.S. brokerage house Paine Webber Group Inc.
Credit Suisse Group, another Swiss bank, followed with its $11.5 billion acquisition of Donaldson Lufkin & Jenrette. Germany's Dresdner Bank AG made a much smaller deal with its $1.4 billion purchase of New York-based Wasserstein Perella & Co.
But the prospects for another round of consolidation still are some way off, possibly three to five years, UBS's Glossman said.
"Based on market capitalization, Merrill is certainly worth looking at," said Mike McKeon, managing partner of Booz Allen & Hamilton's financial services group. "But it won't be an easy acquisition for anyone."
Citigroup (C: down $0.38 to $48.75, Research, Estimates) has the balance sheet to buy Merrill but doesn't need it since it already has Salomon Smith Barney.
But don't count out the Europeans. Switzerland-based UBS (UBS: up $2.33 to $46.69, Research, Estimates) could be poised to make another purchase once it digests the strong retail franchise of Paine Webber.
But with a $44 billion market capitalization, Merrill may be too big for UBS.
Deals gone bad
European takeovers of U.S. banks sometimes cause more pain than gain. Take Credit Suisse Group, which has hit significant bumps with its DLJ purchase, losing some high-ranking executives. Credit Suisse First Boston, the U.S. investment banking arm, currently is undergoing a federal investigation that alleges the bank requires big investors to pony up large commissions in exchange for access to IPOs. CSFB also ousted CEO Allen Wheat and replaced him with former Morgan Stanley CEO John Mack.
Some believe Credit Suisse Group could be back in play once it sorts out its lumps with DLJ.
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Merrill Lynch | |
Dresdner Bank is another poster child for bad mergers. Dresdner acquired Wasserstein last September after failing in its bid to buy Commerzbank and Deutsche Bank. But then, German insurer Allianz bought Dresdner for $21 billion last April. Confused? It gets worse.
Dresdner, when it bought Wasserstein, didn't take into account the different transatlantic cultures. German-based Dresdner is known for being overly analytical, which clashes with Wasserstein's take-charge attitude. Now parent Allianz has called off the DKW initial public offering (which reportedly has made the bankers hoppin' mad) and cut 1,500 investment bankers amid a clash of personalities.
Allianz could be on the prowl, but with the Dresdner takeover still fresh the insurer likely is out of immediate contention.
These problems might be enough to cause overseas acquirers to back off for now. Europeans also usually don't buy when the market is down and typically wait until after a bounce. Companies also are reluctant to sell when their share prices are so depressed, analysts said.
"If the Europeans do buy, it won't be now," Lehman's Constant said. "A lot of the time they prefer to wait until the coast is clear instead of bottom tick the market." 
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Merrill settles arbitration case with former client for $400,000 - July 20, 2001
Merrill 2Q plunges from year ago; warns on 3Q - July 17, 2001
Merrill shifts management - Feb. 14, 2000
UBS to buy PaineWebber - July 12, 2000
Credit Suisse to buy DLJ for $11.5B - Aug. 30, 2000
Chase to buy J.P. Morgan - Sept. 13, 2000
Deutsche Bank profits hit - Aug. 1, 2001
CSFB appoints John Mack as CEO - July 12, 2001
Morgan Stanley profit drops but exceeds target - June 21, 2001
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Merrill Lynch
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