Moving to compete in the quickly consolidating Canadian financial services market, Merrill Lynch & Co. said Monday it would buy the country's largest brokerage, Midland Walwyn Inc., for about $855 million.
The deal, a pooling of interests, would re-establish Merrill as a dominant force in the Canadian retail brokerage market, which it left in 1990. It would also earn Merrill a place among the top three Canadian firms in debt and equity underwriting and trading, as well as mergers and acquisitions advisory.
Midland Walwyn has "really good relationships with Canadian corporations, which will clearly help us," said Merrill's chairman David Komansky. "We have a small equities presence there, but we never have grown that as much as we would have liked."
Merrill's move comes on the heels of two megamergers that would narrow the field of major Canadian banks from six to four. The country's banking companies have also been snapping up Canadian and U.S. brokerage firms.
Royal Bank of Canada and Bank of Montreal announced a $26.6 billion merger pact in January that would create a $313 billion-asset powerhouse. Canadian Imperial Bank of Commerce and Toronto-Dominion Bank unveiled a $15.8 billion accord in April that would produce a $316 billion-asset company.
Merrill executives said that the Midland Walwyn acquisition would give the firm the size, scale, and product line it needs to compete against those giant banks. The U.S. brokerage plans to create a new entity, Merrill Lynch Canada Inc.
Midland has 3,240 employees, including 1,275 financial advisers. The firm, which plans to have 3,000 brokers by 2002, has 116 retail offices throughout Canada.
The acquisition is a clear example of Merrill's global strategy, which calls for the firm to make select acquisitions in most of the world's major markets. Mr. Komansky said Merrill's purchase of London's Smith New Court in 1995 had given the firm expertise in buying and then building foreign equities shops.
But the Midland Walwyn deal is also a homecoming of sorts. Merrill pulled the plug on its Canadian asset management and retail brokerage unit in 1990 due to regulations that prevented it from offering a full array of financial products, Mr. Komansky said.
That same year, a former Merrill executive, Robert Schultz, took the helm of Midland Walwyn, which was formed by the merger of two Canadian brokerages, Midland Capital Corp. and Walwyn Stodgell Cochran Murray Ltd.
"Many things have changed since then," Mr. Komansky said at a press conference Monday. "The financial services industry has reached a certain size and scale, the regulatory climate is different, and today's markets have globalized to such an extent that it is palpable."
Indeed, analysts said the deal reflects Merrill's increasing emphasis on globalization.
"It's a good example of a reversal in strategy that reflects the changes that have occurred in Canada and at Merrill," said Samuel Liss, an equity analyst at Credit Suisse First Boston. In the late 1980s and early 1990s Merrill did not rely as heavily on foreign revenues as it does today, he said.
While the deal would get Merrill back into the Canadian retail market, it also strengthens its corporate finance business there, Merrill's executives said.
"Our presence in Canada has mostly been on the fixed-income side, while Midland's has tilted toward equities and advisory," Mr. Komansky said.
The Canadian equities underwriting business has been largely a "bought market," meaning there is little competition and very thin margins. But Mr. Komansky said he sees that changing.
"There hasn't been a lot of cross-border issuance in Canadian equities," he said. "That's bound to change as corporations get bigger and more sophisticated."
The deal is expected to close by the end of the third quarter. While Canada's bank mergers cannot move forward before the country's regulators complete a study of the nation's banking market, the Merrill transaction is not expected to be affected. The study is not expected out before September.
Under terms of the deal, Midland shareholders would be entitled to get 0.24 share of either Merrill Lynch Canada or Merrill Lynch & Co. for each share of Midland they hold. That would be 3.3 times Midland's book value and 20 times its 12-month trailing earnings.
The acquisition is expected to have a neutral effect on Merrill's bottom line through 1999 and add to earnings thereafter, according to Merrill's estimates.
"I think any time you argue that an acquisition is not going to be accretive for the first 18 months, you have probably pushed your normal pricing matrix," Mr. Liss said. "They are clearly making a bet on cross- selling and building in the market."
Midland Walwyn was advised by BT Wolfensohn, a unit of Bankers Trust Co.; Merrill Lynch advised itself.
