An online joint venture announced Tuesday between Merrill Lynch & Co. and HSBC Holdings PLC gives HSBC a critical new plank in its Internet expansion effort and thrusts Merrill into direct competition with banks worldwide for retail customer business on just about every level.
The companies plan to inject up to $1 billion over five years into the new company, to be named Merrill Lynch HSBC. Its primary mission will be to attract new customers among high-net-worth investors outside the United States.
The venture, which will offer banking and brokerage services, "will be able to serve customers in more markets more quickly and more effectively than either of us could alone," said David H. Komansky, chairman and chief executive of Merrill Lynch.
The partnership, which the companies are touting as the first of its kind, gives HSBC yet another avenue to increase its wealth management business. It has buttressed this business through a series of deals such as its purchase last year of Republic New York Corp.
HSBC, along with Deutsche Bank AG and some other major European banking companies, has been leading the drive to use the Internet, rather than branches, to expand retail operations.
A spokeswoman said HSBC is not moving away from bricks and mortar but is giving people who prefer to bank and invest online an option. HSBC will continue to offer InvestDirect, an online brokerage for customers in the United Kingdom and Canada and online banking for customers in the United Kingdom.
A Merrill spokesman said the company approached HSBC this year as a way to tap the huge potential online investing boasts outside the United States.
"We have already in the United States a considerable amount of offerings that one would associate with a commercial bank, so there was not much gain for us doing anything here in the United States beyond what we already have," he said.
Though small in financial terms, "in the chess match of strategic maneuvering as it relates to delivery of Internet financial services, I think it is a big move," said Dean Eberling, a senior vice president who covers Merrill for Keefe, Bruyette & Woods Inc.
Cross-border deals are gaining popularity among financial services companies looking to expand beyond home turf. Last week, Chase Manhattan Corp. announced a deal to buy Robert Fleming Holdings Ltd. of London. In October, Allianz AG said it would buy majority ownership of PIMCO Advisors. Citigroup Inc. also recently signed a deal to buy U.K. investment firm Schroders.
Though the venture spurred talk among Wall Street traders that a deeper alliance between HSBC and Merrill might be in the works, the two companies played down that notion. (See related story on this page.)
Merrill's move overseas follows its foray into online brokerage in the United States. It has also announced plans to offer banking services over the Internet here. But it has lagged competitors on such offerings in the United States, and until now it had put its overseas resources into bricks and mortar.
The venture is "one way to get up to speed as quickly as possible in an extremely competitive marketplace," said John Payne, an analyst at Cerulli Associates Inc. of Boston.
The HSBC-Merrill alliance also raises the stakes for competitors like Charles Schwab Corp., which made its own direct play for wealthy customers in the United States with a deal to buy U.S. Trust Corp. Some observers said the time may be ripe for Schwab to make overtures overseas.
"Merrill Lynch has raised the ante overseas, and I would expect Schwab to answer in some form sooner than later," said Michael A. Flanagan, an analyst at Financial Service Analytics in Philadelphia.
A spokesman for Schwab said the company is very interested in opportunities in Europe but is not ready to discuss specific plans. He pointed out that Schwab is already the largest online broker in the United Kingdom.
For its part, HSBC, has been building its wealth management capabilities. It bought Republic New York on Dec. 31, and on April 1 it announced a deal for Crédit Commercial de France, which has a strong presence among high-net-worth investors.
A Merrill spokesman said the new company will be operational by yearend and will initially be available only to customers in the United Kingdom, followed by Australia, Canada, Germany, Hong Kong, and Japan. Merrill Lynch HSBC plans to be in 21 countries within four years, he said.
The venture is not expected to turn a profit for about five years, Mr. Komansky said. Edward L. Goldberg, Merrill Lynch's executive vice president of operations services, is its interim chief executive.
Merrill Lynch HSBC is to offer a deposit account through which customers would be able to invest. Over time, the service is will include a range of online products such as bill-payment, mortgages, and credit cards.
Merrill Lynch HSBC plans to hire about 100 people, including investment professionals.