Any deal involving a large U.S. banking company buying Merrill Lynch & Co. would face some regulatory and legal hurdles, but not of a kind likely to jeopardize it financial services and merger attorneys said Friday.
A post-merger company might have to deal with issues regarding deposit caps, nonconforming subsidiaries, and the size of its brokerage force. Still, lawyers contacted last week said an acquisition of Merrill by a large bank would probably pass muster.
Perhaps the most obvious issue for Wachovia Corp., the company to which Merrill chief executive Stan O’Neal is said to have reached out, would be that a combination with Merrill’s brokerage could raise regulatory or antitrust concerns. Wachovia has 11,400 representatives in 786 U.S. offices, second to Merrill’s 16,000 brokers.
Kip A. Weissman, a partner at Luse Gorman Pomerenk & Schick PC in Washington, said a combination of the two companies would almost certainly end in a combined broker force well under the 27,000 or so that now work at the firms. He said he thought Wachovia would have a hard time retaining a significant number of Merrill brokers.
“The biggest winners from a Merrill-Wachovia merger would be the other financial services companies that could pick up what is left over,” he said.
Assets under management would not be an issue, other lawyers said. Merrill manages $1.7 trillion of client assets, and Wachovia has $800 billion.
“I don’t think this rises to such a level that antitrust alarms would be triggered,” said Gilbert Schwartz, a partner at Schwartz & Ballen LLP in Washington. “Their percentage of the market is just not that dramatic. There is a lot of competition in this market.”
“There has long been a trend in regulated industries like financial services to allow firms to bulk up,” he said. “The clear preference is to allow these mega-organizations. The established belief is, bigger is better.”
Ronald Janis, a bank M&A lawyer at Pitney Hardin LLP in New York, agreed. “Based on [asset] size, this isn’t a deal anyone would stop,” he said. “There are just so many large competitors that have huge market share as well. These are large players, but they are still small when considered with the rest of the market.”
Mr. Schwartz said bank regulators would not balk at Merrill’s primary businesses other than brokerage, such as securities lending, merchant banking and investment banking. And Merrill has exited some businesses that could pose an issue. (It sold a real estate brokerage in 1986, for example.) “From a legal standpoint, there really is no barrier that would make this type of deal impossible to accomplish,” he said.
Mr. Janis said some banks might have to consider the deposit cap if they tried to buy Merrill. However, as Bank of America Corp. has demonstrated, this is an issue that can be handled by letting term deposits run off or by other such methods.
Still, Mr. Weissman said he is skeptical a deal of this size will happen. “This deal would be a big gamble for Wachovia,” he said. “I don’t see this deal dying because of regulatory issues. Its issues are economical, operational, and political,” he said.
He added, “This is a big bite for Wachovia, and this is a job-on-the-line kind of bite. In something like this, it could be a disaster in five years.”
Some lawyers said international banks might be more comfortable about, and better suited to make a bid for Merrill, though Mr. Janis said the Federal Trade Commission and the Justice Department tend to be far more accommodating when it comes to large U.S. banks’ buying U.S. investment banks. “Take the Citi-Smith Barney deal, for example,” he said. “That was a similar deal, and there were no major issues there.”
