Merrill to Buy Market Maker Herzog for Up to $1 Bln (Update4)
Merrill to Buy Market Maker Herzog for Up to $1 Bln (Update4)
(Updates with closing share prices.)
New York, June 5 (Bloomberg) -- Merrill Lynch & Co., the
biggest U.S. brokerage, agreed to buy privately held Herzog Heine
Geduld Inc. for as much as $1 billion, a transaction that would
make it the second-biggest stock-market middleman, a person
familiar with the matter said.
Herzog is the No. 3 market maker in shares traded on the
Nasdaq Stock Market. Spokesmen for Merrill and Jersey City, New
Jersey-based Herzog declined comment.
The pact would be bad news for Knight Trading Group Inc., the
No. 1 Nasdaq market maker, whose shares fell 13 percent, the
biggest drop in 10 months. It would vault Merrill from sixth place
in a business it shunned three years ago. Since then, technology
has cut trade-processing costs, making it more attractive for
Merrill to handle the business in house.
Merrill last week said it would increase the number of
companies' shares in which it makes a market to 2,000 from 550 to
capture more of the trading profits from orders it now passes on.
``It's a buy-versus-build decision,'' said Amy Butte, a Bear
Stearns Cos. analyst. ``It gets them to their goal of trading
2,000 stocks -- actually over 6,000 with Herzog -- much faster
than it would have if they had to build it themselves, which would
have taken until the first quarter of 2001.''
The acquisition would give Merrill a 74-year-old business
that also makes markets on British and German exchanges. A market
maker purchases and sells specific companies' shares, profiting on
the gap between ``buy'' and ``sell'' prices.
The agreement was previously reported by Dow Jones Newswires.
Merrill-Herzog Alliance
A Merrill-Herzog alliance would be a blow to Knight in part
because it would interrupt order flow from Merrill, said Ken
Worthington, an analyst at CIBC World Markets Corp.
``All that volume is now going to go to Herzog,'' he said.
Knight's ``market share is going to continue to decline.''
Knight's stock, based on an estimated $800 million or $900
million being paid for Herzog, would be worth three quarters of
what it was at today's opening, according to Bear's Butte. The
shares fell 4 9/16 to 30 15/16.
To be sure, Merrill would face new competition. Citigroup
Inc.'s Salomon Smith Barney rebuffed overtures from Herzog a few
months ago and decided to build its own automated market-making
system, a person with knowledge of the project said.
A boom in Nasdaq trading of high-tech companies has lured
companies into the business. Nasdaq trading surged to a record 2.9
billion shares on April 4, and the daily average jumped to 1.8
billion in the first quarter from 988 million a year earlier.
Merrill shares fell 1/2 to 107 1/2.
Herzog ranks third, based on its share of trades, executing
9.3 percent of Nasdaq transactions for the year to date through
May, compared with 12 percent for No. 2 Charles Schwab Corp. and
18 percent for Knight, according to Thomson Corp.'s Autex Block
Data group. Merrill has a 3.3 percent market share. |
