Merrill Lynch & Co. is on the hunt for an offshore private bank.
Jerome P. Kenney, a Merrill executive vice president in charge of corporate strategy, said in an interview last week that the firm would like to buy a small, foreign-owned institution with an affluent customer base.
The ideal candidate would have a market capitalization of about $5 billion and both commercial and investment banking capabilities, Mr. Kenney said. And it would add to Merrill's global prowess in several businesses, including asset management, custody and trust, jumbo mortgages, and structured and syndicated lending.
"There are some bank-like services where we are not as complete as we'd like to be because of previous regulatory or legislative limitations," said Mr. Kenney, a member of Merrill Lynch's 19-member executive management committee.
"We are looking at either expanding organically or possibly acquiring something to fit our needs."
Mr. Kenney's remarks shed light on Merrill Lynch's acquisition plans, which have been the subject of much speculation in recent weeks. After shunning advances from Chase Manhattan Corp., the New York brokerage has been named as a possible acquirer of everything from BankAmerica Corp.'s Robertson Stephens unit to Mellon Bank Corp.
But Mr. Kenney said a deal for a U.S. bank is probably not in the cards. The firm's taste runs more toward foreign banks, which have not been prohibited from engaging in Merrill's core securities business.
An offshore bank would also be more in line with Merrill's plans to become a truly global firm.
"We're not likely to buy a regional U.S. bank, although that may be the best bank in the world," Mr. Kenney said. "We are interested in something that fits our broader country strategy or our middle-market strategy."
Merrill has been on an international buying spree for the past few years, acquiring firms in most of the world's major markets. Merrill's senior management likens the firm's acquisition strategy to "stringing pearls on a necklace."
The firm purchased London-based Mercury Asset Management last year for $5.3 billion. That followed Merrill's 1995 purchase of Smith New Court PLC, a broad-based U.K. securities firm and market maker of British equities, for $842 million.
In the last few years, Merrill has snapped up brokerages in Europe, the Asia Pacific, and South Africa. This summer, it plans to open 33 offices in Japan, after leasing offices and hiring many former employees from the failed Japanese brokerage Yamaichi Securities.
The buying binge is partly in response to intense pressures on the global financial services industry-spurred by technology, globalization, and regulatory changes, Mr. Kenney said. He predicts that these pressures will continue for at least five years.
"No individual firm can fight these forces without modifying its strategy or can say it is so well-positioned and strong that it can ignore these forces," he said.
Merrill observers agreed that a foreign bank-preferably a small European private bank-would serve the firm's goal of emerging as a premiere global investment bank.
"It could be attractive for them to buy a small commercial bank with a local presence that allows them to develop private banking relationships in Europe," said Joan Solotar, an equity analyst with Donaldson, Lufkin & Jenrette. "It could enable Merrill to leverage its fixed-income and equity underwriting capabilities."
A foreign bank with a significant U.S. presence would let Merrill kill two birds with one stone, analysts said. It would augment Merrill's growing global reach, while enhancing the commercial banking services it offers to U.S. clients.
A commercial bank might also let Merrill combine its trust capabilities in a single entity bank, making it more efficient and possibly facilitating the purchase of another trust company, analysts said.
There are some aspects of commercial banking that do not interest Merrill, Mr. Kenney said. Though Merrill offers syndicated loans as part of its one-stop-shopping strategy for corporations, it is not "interested in doing thousands of one-on-one loans," Mr. Kenney said.
"But we are interested in lending that is complimentary to capital markets decisions or secured lending to affluent private clients," he added.
Similarly, though Merrill offers credit cards to customers that have its all-in-one Cash Management Account, Mr. Kenney said the brokerage does not need a large, visible credit card unit to attract affluent clients.
That view differentiates Merrill from some other financial giants, including the proposed Citigroup. Samuel Hayes 3d, an investment banking professor at Harvard Business School, said Merrill executives might not be interested in cards because they are not as profitable as the firm's core businesses.
"But if they thought they needed a credit card to keep customers from going to Citibank, they might well decide to go after one in big way," he said.
Mr. Hayes said of all the recent highly publicized mergers in the financial services industry, the deal announced between Citicorp and Travelers Group was the most likely to affect Merrill's strategy.
"In a sense, Merrill is replicating what Citicorp has in place in the commercial banking sector all over world," Mr. Hayes said. "Merrill is moving into many of the same markets from another angle."
But he said Merrill is "edging into services that are more traditionally commercial banking," while Citicorp would "edge into investment banking" if it merges with Travelers, which owns Salomon Smith Barney.
What most industry observers seem certain of is that Merrill intends to remain a buyer rather than a seller amidst the feverish pace of consolidation and convergence in the financial services industry.
"They're still earning more on capital than any of the other companies being touted as merger candidates," said Raphael Soifer, an equity analyst with Brown Brothers Harriman.
Merrill had a 26.8% return on equity in 1997, putting it 5% to 10% ahead of most large U.S. commercial banks, Merrill's most likely suitors.
