After a quarter in which profits more than doubled, Merrill Lynch & Co. plans to use capital it got from its deal with BlackRock Inc. for "organic and inorganic" growth, an executive said.
Jeffrey Edwards, a senior vice president and Merrill's chief financial officer, said Tuesday during its earnings conference call that the deal, which closed Sept. 30, will enable his company to add staff and make more deals.
"As we think about deploying that capital, our first focus is on organic initiatives, and, as you can see from the progress we made through the year, we continue to have good organic opportunities," Mr. Edwards said. "We also have an opportunity to redeploy capital into acquisitions, and we have been more active on that front in the third quarter, and we'll need to fund that."
Merrill's third-quarter earnings rose 120% from a year earlier, to $3 billion, or $3.17 a share. The results included a gain of $1.1 billion, or $1.17 a share, from the BlackRock deal.
In the first quarter Merrill announced an agreement to merge its investment management arm with BlackRock, which had been majority-owned by PNC Financial Services Inc. The deal gave Merrill a 49.8% stake in BlackRock. PNC's stake dropped to 34%.
Last month Merrill agreed to buy First Franklin Financial Corp., a San Jose originator of loans through brokers, from National City Corp. for $1.3 billion to increase its scale in the mortgage origination business, Mr. Edwards said.
That deal, which Merrill expects to close this year, was its fourth for a mortgage company in the last two years but its first for a U.S. originator. Merrill also would pick up a Pittsburgh servicer with a $39 billion portfolio, and NationPoint, an online lender in Lake Forest, Calif., from Nat City.
Mr. Edwards said Merrill also is developing its mortgage origination business in foreign markets, including Turkey, the United Kingdom, and South Korea.
In addition, this year Merrill plans to close deals for a hedge fund provider and a provider of electronic cash management execution services, Mr. Edwards said.
The pipeline for deals is at record levels, he said. "Thus far fourth-quarter conditions for execution of this pipeline appear to be more positive" than they were in the third quarter.
Analysts said that the third quarter is typically difficult, because of the summer slowdown, but that strong market conditions last month helped companies such as Merrill, Goldman Sachs Group Inc., and Morgan Stanley. Both Goldman and Morgan Stanley reported strong growth for the quarter.
Glenn Schorr, an analyst with UBS Investment Bank who covers Merrill, wrote in a research note issued Tuesday that Merrill had "overall great results." However, "we are mindful of … [its] relative valuation and the ROE gap that still persists for the group."
Michael Hecht, an analyst at Bank of America Equity Research, wrote in a research note issued Tuesday that Merrill's revenue from fixed-income trading and investment banking was better than expected. He maintained his "buy" rating for the stock.
Excluding the BlackRock transaction, Merrill would have reported that third-quarter profits jumped 19% from the second quarter, to $1.9 billion, or $2 a share. Those earnings exceeded the average of analysts' estimates by 53 cents, according to Thomson First Call. (Those estimates excluded the BlackRock transaction.)
Third-quarter revenue rose 48% from a year earlier, to $9.9 billion. Analysts had expected revenue of $7.3 billion, according to Thomson First Call.
Merrill's stock rose 0.63% Tuesday, to $84.64 a share.
Assets under management rose 14% from a year earlier, to $598 billion just before the BlackRock deal. Merrill added $1 billion of assets during the quarter.
Mr. Edwards said his company continues to hire. Its global private-client group added 540 financial advisers in the first nine months of this year, including 180 in the third quarter, to give the group a total of 15,700. He said 25% of the advisers added last quarter were in foreign markets.
