On Monday, Merrill Lynch announced plans to acquire First Republic Bank, a San Francisco-based private banking and wealth-management firm with $16.4 billion in assets under management, for $1.8 billion. The transaction should be completed in the third quarter of 2007, pending regulatory and shareholder approvals.
“First Republic will enable Merrill Lynch to accelerate its strategic objective of growing its high-net-worth business,” said Robert McCann, president of Merrill’s global private client group. (Read the firm’s press release here.) “We look forward to supporting First Republic’s further expansion with additional capital and a greater range of investment products, advice and services.”
While the price is a little steep—$1.8 billion, or $55 per share, to be paid to First Republic stockholders in equal parts cash and Merrill Lynch stock—it’s a good move for Merrill Lynch, say analysts. “I would have liked Merrill to pay less, but they’ll make it work,” says Sandler O’Neal analyst Jeff Harte. First Republic’s lending capabilities to small businesses and high-net-worth individuals fill a gap that Merrill has struggled to fill on its own, he says. “They’ve tried to develop that organically but it hasn’t gone as well as expected.” In addition, Harte likes the cross-selling opportunities that this new client pool presents for Merrill financial advisors. He says First Republic’s excellent management team is also a plus.
Punk Ziegel analyst Dick Bové agreed. “The price being paid is quite high for a banking company,” Bové wrote in a research note today. But, “it’s paying such a high price due to the uniqueness of the First Republic franchise,” he wrote, referring to the wealthy First Republic clientele.
Other wirehouses could follow with similar transactions in the near future, says Alois Pirker, an analyst with Boston-based Aite Group. Most of the wirehouses are looking to add specialty high-end advisory services for the ultra-wealthy, while so many of the private banks are looking for scale—profit margins in private banking have gotten razor thin, he says. “This type of firm is in the category that all the larger firms are looking into—the numbers are not too big and not too small, so they can still swing it and it won’t hurt the balance sheet.”
According to McCann, Merrill Lynch won’t mess with a good thing: They will leave First Republic to operate as a separate division with its own brand identity and strategic goals. He expects the “entire private client organization to benefit from its outstanding history, excellent credit and lending capabilities, and its experienced management team.”