Merrill Lynch & Co. has emerged as the strongest competitor to Goldman Sachs Group Inc. and Citigroup Inc. in the contest for investment-banking fees.
Merrill, the world's biggest securities firm by capital, collected $539 million in fees in the third quarter from underwriting stocks and bonds and advising on acquisitions, according to Freeman & Co., a Wall Street consultant. Goldman, the No. 3 securities firm, had $526 million in fees. Citigroup, the world's largest financial institution, earned $525 million.
For E. Stanley O'Neal, the 52-year-old chairman and chief executive officer, it is the first time New York-based Merrill has earned more fees from investment banking than any of its rivals in a quarter, according to Freeman. Since O'Neal was elevated to CEO in December he has cut 3,100 jobs, taking the total eliminated by O'Neal as CEO and in his previous post as president to 18,100.
``O'Neal is not from the old-boy network,'' said Mark Bronzo, who helps manage $67 billion, including a $70 million Merrill stake at Gartmore Separate Accounts LLC in Irvington, New York. ``O'Neal said if we're not making money in a business, get rid of the bankers -- a novel approach at Merrill. Merrill doesn't appear to have suffered, in fact it motivated others.''
The retrenchment helped boost Merrill's third-quarter earnings by 50 percent to $1.04 billion, the second-best quarter in the company's 89-year history.
Merrill boosted fees from underwriting share sales in the latest three-month period by 68 percent from a year ago to $146 million, data compiled by Bloomberg show. A year ago, the firm ranked seventh in equity underwriting; this year it's fourth.
Mergers Advice
In mergers advice, for which securities firms are paid about 0.3 percent of the value of a transaction, Merrill ranked second behind Goldman Sachs in advising on acquisitions that were completed in the third quarter, working on 43 assignments with a combined value of $56 billion.
To be sure, one quarter doesn't make a trend and Merrill still lags Citigroup and Goldman in fee income from investment banking for the nine months ended Sept. 30. In the market for U.S. convertible bonds, Merrill's share of fees declined to 7 percent in the third quarter from 20 percent a year earlier, according to Bloomberg data.
Merrill also ranks seventh in winning new assignments for mergers and acquisitions, its worst performance since the second quarter of last year, signaling that fees from completed transactions may wane in the months ahead.
`Not Proof'
``O'Neal has done a great job so far of cutting expenses that didn't make sense, cutting international operations and trying to right-size the company,'' said Anton Schutz, who manages the $240 million Burnham Financial Services Fund. ``But one quarter is not the proof.''
Merrill ranked second behind Citigroup for all of 2002 in collecting investment-banking fees, the Freeman data show. Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.
Ahmass Fakahany, Merrill's chief financial officer, said last week that investment-banking revenue rose from the year-ago period because of increased equity and debt underwriting. In mergers, ``the level of deal activity and dialogue relating to deals is heating up meaningfully since last year,'' Steven Baronoff, Merrill's global M&A head, said in an interview.
O'Neal installed a new team of senior executives since becoming president of Merrill in July 2001, replacing seven managers of business units including Jeffrey Peek, who ran asset management; Winthrop Smith and Kelly Martin, former managers of the international brokerage unit; and Michael Marks, chairman of asset management and the international brokerage.
Patrick Quits
The departures also included three former heads of investment banking: Thomas Davis, Paul Roy, and Arshad Zakaria. Executive Vice Chairman Thomas Patrick resigned in August after failing to persuade O'Neal to promote Zakaria to president.
Investment banking is now managed by Gregory Fleming, former co-head of financial institutions investment banking, and Dow Kim, who ran the firm's global debt business. Fleming and Kim declined to comment.
O'Neal dismantled much of the international expansion by his predecessor David Komansky during the previous five years, exiting or scaling back broking in Japan, Canada and South Africa. Komansky expanded into Japan in 1998, taking over failed Yamaichi Securities Co., giving Merrill 30 branches and 2,000 employees. Today, only two retail branches remain in the country.
`Weathering the Storm'
The reduction in costs has helped Merrill increase earnings in each of the past six quarters. The pretax profit margin in the most recent three-month period was the widest since 1976, rising to 30 percent.
``Who weathered the investment-banking storm best? Merrill Lynch,'' said Brad Hintz, a financial-services analyst at Sanford C. Bernstein in New York. ``O'Neal has done exactly what he said he would: cutting back on low-margin ends of the business and not on the muscle. The numbers really prove it.''
By some measures, Merrill still lags Goldman and Citigroup. While Merrill's return on equity rose to 15 percent in the third quarter from 13 percent a year earlier, that's still below Goldman's third-quarter return on equity of 18 percent and Citigroup's second-quarter return on equity of 19 percent. Merrill stock trades at 16.8 times earnings, compared with 17.6 for Goldman and 17.1 for Citigroup.
Citigroup's third-quarter earnings will be published today. The New York-based company may report an increase of at least 10 percent to $4.3 billion, or 85 cents a share, according to the average forecast of 15 analysts surveyed by Thomson Financial. Investment-banking profit probably increased 38 percent to $1.43 billion, according to Guy Moszkowski, an analyst at Merrill.
Buying Merrill Stock
The shares of Merrill have outpaced rivals in recent months, increasing 52 percent in the past 12 months, compared with 20 percent for Goldman and 35 percent for Citigroup.
Merrill's biggest shareholders, State Street Corp., Fidelity Management and Barclays Bank Plc, each bought more Merrill stock during the second quarter, according to filings with the Securities and Exchange Commission. The same three are also the three biggest owners of Morgan Stanley, the world's second-biggest securities firm after Merrill, and each of them sold Morgan Stanley shares during the same period.
Citigroup and Morgan Stanley's fund units bought Merrill stock in the second quarter. Citigroup and J.P. Morgan Chase & Co. investors sold Morgan Stanley shares in the same period. Fund managers at the firms, including Richard Freeman at Citigroup and James Gilligan at Morgan Stanley's Van Kampen unit, didn't return calls seeking comment. Fidelity's Robert Stansky declined to comment.
Advising Japan
Morgan Stanley ranked fourth in fees in the third quarter, according to Freeman. The New York-based securities firm ranks third in international bonds underwriting this year, third in global equity underwriting and fourth in mergers advice, according to Bloomberg data.
While Merrill has scaled back its international brokerage, the company has boosted its ranking for equity underwriting in Europe and Asia to third place from sixth in the third quarter of 2002. Fees rose to about $60 million from $39 million, Bloomberg data show.
Merrill's two largest merger billings in the third quarter came from outside the U.S. Merrill advised Japan's Resona Holdings Inc. on a $16.6 billion government bailout, its largest merger assignment in 2003, as the government took control of the bank.
Merrill advised Telecom Italia SpA in a $7.8 billion merger with its parent Olivetti SpA. Merrill later was hired to help Telecom Italia sell as much as $4 billion in bonds to refinance maturing debt and cut interest costs in Europe's biggest sale of corporate bonds in nine months.
Long-Term Clients
Resona and Telecom Italia ``are good long-term clients for mergers and acquisitions and multiple other products,'' Merrill's Baronoff said in a telephone interview from his New York office.
Investment banking accounted for a larger slice of Merrill's revenue in the third quarter: 13 percent compared with 11 percent a year earlier. In the third quarter of 2001, Merrill's underwriting and advisory fees made up 16.3 percent of revenue.
In September, Merrill reorganized investment banking, combining debt and equity sales and trading units to focus on higher-margin business, such as mergers advice and equity underwriting. The move also was designed to make bankers that call on corporate executives work more closely with those assigned to work on underwriting and merger advice.
Last month, Sam Chapin, Harry McMahon and Jim Quigley were named vice chairmen charged with calling on executives and government officials that are, or could become, Merrill clients. The three bankers report jointly to Fleming, Kim and O'Neal.
`Greater Agility'
The re-alignment enables Merrill ``to allocate resources and cover clients with greater agility,'' Merrill's Fakahany told investors in a conference call last week.
Some of the companies that have recently hired Merrill Lynch for underwriting assignments or mergers advice include Chubb Group Inc. and Textron Financial Corp. in Providence, Rhode Island, the financial subsidiary of the manufacturer of Cessna airplanes.
``We view Merrill as a leader,'' said Brian Lynn, treasurer of Textron Financial, whose relationship with Merrill goes back to the company's private placement in the early 1990s. ``They have a knack for calling on us when we need them. Morgan Stanley has never supported us with credit, and we've never used them in any investment-banking context.'' Textron's parent company has used Morgan Stanley for debt sales, Lynn said.
Morgan Stanley spokesman Andrew Walton declined to comment.
Merrill doubled its lending in the past five years. It had $88.8 billion in loans on its balance sheet as of June 30, compared with $44.4 billion on Sept. 30, 1998. The value of its loan portfolio rose 15 percent in the past year.
More Lending
``Merrill has terrific retail distribution, and we wanted a significant proportion of the distribution to go to retail investors because it creates a stable market,'' said Michael O'Reilly, chief financial officer of Chubb, an insurer based in Warren, New Jersey, which used Merrill, Goldman and Citigroup to underwrite $800 million of stock and $400 million of convertible bonds in June. ``Retail investors are long term holders.''
``This is a feather in their cap,'' said Marshall Front, who manages $1.5 billion at Front Barnett Associates LLC in Chicago, who passed on buying Merrill stock some months back and regrets it. ``I've been conditioned to expect those numbers from Citigroup or Goldman Sachs. I am surprised because people focus on Merrill as a successful retail broker.''
Freeman's data does not include fees for raising funds for private equity firms, fees from underwriting asset-backed and mortgage-backed securities and syndicated loans, or fees from restructuring advisory work. Freeman also counts 100 percent of M&A fees at the completion of a transaction, while banks typically count it in lumps, with the bulk at the close.
Glass-Steagall
Ever since the repeal of the Glass-Steagall Act in 1999, commercial banks such as Citigroup and J.P. Morgan Chase have been eroding the share of investment banking revenue held by stand- alone securities firms such as Goldman or Morgan Stanley. Merrill Lynch, which owns the eighth-biggest bank in the U.S., straddles that divide and can offer customers loans, thereby easing the way for selling investment-banking services.
``It is getting more competitive,'' said Carter McClelland, president of Banc of America Securities LLC, the investment banking arm of Bank of America Corp. ``We think that three years down the road some of the three big U.S. banks will have become larger players relative to the three largest investment banks.''
Following is a table of fees and market share for the top ten investment banks, according to Freeman and Co. Freeman includes fees from initial and secondary public sales of shares, as well as block trades, securities convertible into shares, investment grade and junk bonds, and merger advice.
Investment Banking Fees* ($ Mln)
3rd Qtr 2nd Qtr 1st Qtr
2003
Mer 539 Citi 805 Citi 469
Gold 526 JPM 596 Gold 468
Citi 525 Mer 592 MgSt 452
MgSt 480 Gold 563 Mer 414
JPM 453 MgSt 563 JPM 373
CSFB 419 UBS 547 CSFB 357
UBS 409 Deut 493 Deut 318
Deut 386 CSFB 445 UBS 284
Leh 331 Leh 379 Leh 262
BofA 182 BofA 270 BofA 221
Source: Freeman & Co. Notes: Ranking is based on fees generated from equity (IPOs, follow-ons, block trades and accelerated book built), convertible bonds, investment-grade Debt, high-yield Debt, completed mergers and acquisitions. Excluded are syndicated loan, asset-backed and mortgage-backed obligation underwriting, private-equity fund-raising and restructuring fees.
Rankings and fee results will not be consistent with other Freeman & Co. customized reports generated for our specific clients. This is due to different selection criteria and withholding of Freeman & Co.'s clients' proprietary information
Merrill, the world's biggest securities firm by capital, collected $539 million in fees in the third quarter from underwriting stocks and bonds and advising on acquisitions, according to Freeman & Co., a Wall Street consultant. Goldman, the No. 3 securities firm, had $526 million in fees. Citigroup, the world's largest financial institution, earned $525 million.
For E. Stanley O'Neal, the 52-year-old chairman and chief executive officer, it is the first time New York-based Merrill has earned more fees from investment banking than any of its rivals in a quarter, according to Freeman. Since O'Neal was elevated to CEO in December he has cut 3,100 jobs, taking the total eliminated by O'Neal as CEO and in his previous post as president to 18,100.
``O'Neal is not from the old-boy network,'' said Mark Bronzo, who helps manage $67 billion, including a $70 million Merrill stake at Gartmore Separate Accounts LLC in Irvington, New York. ``O'Neal said if we're not making money in a business, get rid of the bankers -- a novel approach at Merrill. Merrill doesn't appear to have suffered, in fact it motivated others.''
The retrenchment helped boost Merrill's third-quarter earnings by 50 percent to $1.04 billion, the second-best quarter in the company's 89-year history.
Merrill boosted fees from underwriting share sales in the latest three-month period by 68 percent from a year ago to $146 million, data compiled by Bloomberg show. A year ago, the firm ranked seventh in equity underwriting; this year it's fourth.
Mergers Advice
In mergers advice, for which securities firms are paid about 0.3 percent of the value of a transaction, Merrill ranked second behind Goldman Sachs in advising on acquisitions that were completed in the third quarter, working on 43 assignments with a combined value of $56 billion.
To be sure, one quarter doesn't make a trend and Merrill still lags Citigroup and Goldman in fee income from investment banking for the nine months ended Sept. 30. In the market for U.S. convertible bonds, Merrill's share of fees declined to 7 percent in the third quarter from 20 percent a year earlier, according to Bloomberg data.
Merrill also ranks seventh in winning new assignments for mergers and acquisitions, its worst performance since the second quarter of last year, signaling that fees from completed transactions may wane in the months ahead.
`Not Proof'
``O'Neal has done a great job so far of cutting expenses that didn't make sense, cutting international operations and trying to right-size the company,'' said Anton Schutz, who manages the $240 million Burnham Financial Services Fund. ``But one quarter is not the proof.''
Merrill ranked second behind Citigroup for all of 2002 in collecting investment-banking fees, the Freeman data show. Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.
Ahmass Fakahany, Merrill's chief financial officer, said last week that investment-banking revenue rose from the year-ago period because of increased equity and debt underwriting. In mergers, ``the level of deal activity and dialogue relating to deals is heating up meaningfully since last year,'' Steven Baronoff, Merrill's global M&A head, said in an interview.
O'Neal installed a new team of senior executives since becoming president of Merrill in July 2001, replacing seven managers of business units including Jeffrey Peek, who ran asset management; Winthrop Smith and Kelly Martin, former managers of the international brokerage unit; and Michael Marks, chairman of asset management and the international brokerage.
Patrick Quits
The departures also included three former heads of investment banking: Thomas Davis, Paul Roy, and Arshad Zakaria. Executive Vice Chairman Thomas Patrick resigned in August after failing to persuade O'Neal to promote Zakaria to president.
Investment banking is now managed by Gregory Fleming, former co-head of financial institutions investment banking, and Dow Kim, who ran the firm's global debt business. Fleming and Kim declined to comment.
O'Neal dismantled much of the international expansion by his predecessor David Komansky during the previous five years, exiting or scaling back broking in Japan, Canada and South Africa. Komansky expanded into Japan in 1998, taking over failed Yamaichi Securities Co., giving Merrill 30 branches and 2,000 employees. Today, only two retail branches remain in the country.
`Weathering the Storm'
The reduction in costs has helped Merrill increase earnings in each of the past six quarters. The pretax profit margin in the most recent three-month period was the widest since 1976, rising to 30 percent.
``Who weathered the investment-banking storm best? Merrill Lynch,'' said Brad Hintz, a financial-services analyst at Sanford C. Bernstein in New York. ``O'Neal has done exactly what he said he would: cutting back on low-margin ends of the business and not on the muscle. The numbers really prove it.''
By some measures, Merrill still lags Goldman and Citigroup. While Merrill's return on equity rose to 15 percent in the third quarter from 13 percent a year earlier, that's still below Goldman's third-quarter return on equity of 18 percent and Citigroup's second-quarter return on equity of 19 percent. Merrill stock trades at 16.8 times earnings, compared with 17.6 for Goldman and 17.1 for Citigroup.
Citigroup's third-quarter earnings will be published today. The New York-based company may report an increase of at least 10 percent to $4.3 billion, or 85 cents a share, according to the average forecast of 15 analysts surveyed by Thomson Financial. Investment-banking profit probably increased 38 percent to $1.43 billion, according to Guy Moszkowski, an analyst at Merrill.
Buying Merrill Stock
The shares of Merrill have outpaced rivals in recent months, increasing 52 percent in the past 12 months, compared with 20 percent for Goldman and 35 percent for Citigroup.
Merrill's biggest shareholders, State Street Corp., Fidelity Management and Barclays Bank Plc, each bought more Merrill stock during the second quarter, according to filings with the Securities and Exchange Commission. The same three are also the three biggest owners of Morgan Stanley, the world's second-biggest securities firm after Merrill, and each of them sold Morgan Stanley shares during the same period.
Citigroup and Morgan Stanley's fund units bought Merrill stock in the second quarter. Citigroup and J.P. Morgan Chase & Co. investors sold Morgan Stanley shares in the same period. Fund managers at the firms, including Richard Freeman at Citigroup and James Gilligan at Morgan Stanley's Van Kampen unit, didn't return calls seeking comment. Fidelity's Robert Stansky declined to comment.
Advising Japan
Morgan Stanley ranked fourth in fees in the third quarter, according to Freeman. The New York-based securities firm ranks third in international bonds underwriting this year, third in global equity underwriting and fourth in mergers advice, according to Bloomberg data.
While Merrill has scaled back its international brokerage, the company has boosted its ranking for equity underwriting in Europe and Asia to third place from sixth in the third quarter of 2002. Fees rose to about $60 million from $39 million, Bloomberg data show.
Merrill's two largest merger billings in the third quarter came from outside the U.S. Merrill advised Japan's Resona Holdings Inc. on a $16.6 billion government bailout, its largest merger assignment in 2003, as the government took control of the bank.
Merrill advised Telecom Italia SpA in a $7.8 billion merger with its parent Olivetti SpA. Merrill later was hired to help Telecom Italia sell as much as $4 billion in bonds to refinance maturing debt and cut interest costs in Europe's biggest sale of corporate bonds in nine months.
Long-Term Clients
Resona and Telecom Italia ``are good long-term clients for mergers and acquisitions and multiple other products,'' Merrill's Baronoff said in a telephone interview from his New York office.
Investment banking accounted for a larger slice of Merrill's revenue in the third quarter: 13 percent compared with 11 percent a year earlier. In the third quarter of 2001, Merrill's underwriting and advisory fees made up 16.3 percent of revenue.
In September, Merrill reorganized investment banking, combining debt and equity sales and trading units to focus on higher-margin business, such as mergers advice and equity underwriting. The move also was designed to make bankers that call on corporate executives work more closely with those assigned to work on underwriting and merger advice.
Last month, Sam Chapin, Harry McMahon and Jim Quigley were named vice chairmen charged with calling on executives and government officials that are, or could become, Merrill clients. The three bankers report jointly to Fleming, Kim and O'Neal.
`Greater Agility'
The re-alignment enables Merrill ``to allocate resources and cover clients with greater agility,'' Merrill's Fakahany told investors in a conference call last week.
Some of the companies that have recently hired Merrill Lynch for underwriting assignments or mergers advice include Chubb Group Inc. and Textron Financial Corp. in Providence, Rhode Island, the financial subsidiary of the manufacturer of Cessna airplanes.
``We view Merrill as a leader,'' said Brian Lynn, treasurer of Textron Financial, whose relationship with Merrill goes back to the company's private placement in the early 1990s. ``They have a knack for calling on us when we need them. Morgan Stanley has never supported us with credit, and we've never used them in any investment-banking context.'' Textron's parent company has used Morgan Stanley for debt sales, Lynn said.
Morgan Stanley spokesman Andrew Walton declined to comment.
Merrill doubled its lending in the past five years. It had $88.8 billion in loans on its balance sheet as of June 30, compared with $44.4 billion on Sept. 30, 1998. The value of its loan portfolio rose 15 percent in the past year.
More Lending
``Merrill has terrific retail distribution, and we wanted a significant proportion of the distribution to go to retail investors because it creates a stable market,'' said Michael O'Reilly, chief financial officer of Chubb, an insurer based in Warren, New Jersey, which used Merrill, Goldman and Citigroup to underwrite $800 million of stock and $400 million of convertible bonds in June. ``Retail investors are long term holders.''
``This is a feather in their cap,'' said Marshall Front, who manages $1.5 billion at Front Barnett Associates LLC in Chicago, who passed on buying Merrill stock some months back and regrets it. ``I've been conditioned to expect those numbers from Citigroup or Goldman Sachs. I am surprised because people focus on Merrill as a successful retail broker.''
Freeman's data does not include fees for raising funds for private equity firms, fees from underwriting asset-backed and mortgage-backed securities and syndicated loans, or fees from restructuring advisory work. Freeman also counts 100 percent of M&A fees at the completion of a transaction, while banks typically count it in lumps, with the bulk at the close.
Glass-Steagall
Ever since the repeal of the Glass-Steagall Act in 1999, commercial banks such as Citigroup and J.P. Morgan Chase have been eroding the share of investment banking revenue held by stand- alone securities firms such as Goldman or Morgan Stanley. Merrill Lynch, which owns the eighth-biggest bank in the U.S., straddles that divide and can offer customers loans, thereby easing the way for selling investment-banking services.
``It is getting more competitive,'' said Carter McClelland, president of Banc of America Securities LLC, the investment banking arm of Bank of America Corp. ``We think that three years down the road some of the three big U.S. banks will have become larger players relative to the three largest investment banks.''
Following is a table of fees and market share for the top ten investment banks, according to Freeman and Co. Freeman includes fees from initial and secondary public sales of shares, as well as block trades, securities convertible into shares, investment grade and junk bonds, and merger advice.
Investment Banking Fees* ($ Mln)
3rd Qtr 2nd Qtr 1st Qtr
2003
Mer 539 Citi 805 Citi 469
Gold 526 JPM 596 Gold 468
Citi 525 Mer 592 MgSt 452
MgSt 480 Gold 563 Mer 414
JPM 453 MgSt 563 JPM 373
CSFB 419 UBS 547 CSFB 357
UBS 409 Deut 493 Deut 318
Deut 386 CSFB 445 UBS 284
Leh 331 Leh 379 Leh 262
BofA 182 BofA 270 BofA 221
Source: Freeman & Co. Notes: Ranking is based on fees generated from equity (IPOs, follow-ons, block trades and accelerated book built), convertible bonds, investment-grade Debt, high-yield Debt, completed mergers and acquisitions. Excluded are syndicated loan, asset-backed and mortgage-backed obligation underwriting, private-equity fund-raising and restructuring fees.
Rankings and fee results will not be consistent with other Freeman & Co. customized reports generated for our specific clients. This is due to different selection criteria and withholding of Freeman & Co.'s clients' proprietary information
3287.99
1275.09
