Merrill Lynch Weighs European Fund to Revive Merchant Banking
Bloomberg News
April 24, 1999, 8:07 a.m. PT
Merrill Lynch Weighs European Fund to Revive Merchant Banking
New York, April 24 (Bloomberg) -- Merrill Lynch & Co., the
biggest U.S. brokerage firm, may raise a fund to buy European
companies, reviving a business it all but eliminated six years
ago, people familiar with the idea said.
Merrill's 18-member executive committee is considering a
report that examines merchant banking -- using a little cash and
a lot of debt to take over companies. The committee probably will
decide whether to enter the business later this year. A Merrill
spokesman declined to comment.
More choices for potential investments have lured merchant
banking firms to Europe, including Kohlberg Kravis Roberts & Co.
and Morgan Stanley Dean Witter & Co. KKR bought U.K. insurance-
broker Willis Corroon Plc for about $1.7 billion in November.
''Merchant banking can be highly profitable,'' said John
Keefe, an independent securities analyst. ''With all the mergers
and acquisitions activity in Europe, there are lots of
opportunities to buy misfit divisions from companies combining.''
To buy the companies or stakes in them, the firms use some
money raised from pension funds, insurance companies and other
institutional investors. They borrow the rest. Once they own the
company, they try to boost profits and may sell parts to help pay
off the debt. Eventually, they take the company public or sell it
to another buyer, multiplying their original equity investment.
European companies are selling units that aren't relevant to
their main businesses as they reorganize to compete in the
borderless market created in January when 11 countries adopted a
single currency.
Soaring Prices
In the U.S., prices for companies have soared with the stock
market and four record years for mergers. That's one reason the
average annual return for such funds last year was 17 percent,
down from an annual average of 19 percent between 1993 and 1998,
according to Venture Economics, a research firm.
Private equity funds are having a harder time finding
suitable targets. Last year, they raised a record $54.5 billion,
up 58 percent from 1997. The partnerships frequently borrow $2
for every $1 of capital raised. That means they had more than
$160 billion available to buy companies last year, primarily in
the U.S. They spent only $41 billion, or 25 percent of it.
''Europe hasn't been mined yet the way the U.S. has,'' said
Michael Holland, chairman of New York-based money manager Holland
& Co. ''Prices being paid aren't as high as in the U.S.''
Hicks, Muse, Tate & Furst Inc., Carlyle Group Inc., Clayton
Dubilier & Rice Inc. and Texas Pacific Group Inc. are raising
funds to acquire companies in the U.K., Germany, France and
elsewhere in Europe. KKR plans to raise $3 billion, Hicks Muse
has a $1.5 billion fund and Carlyle a $1.1 billion fund.
Merrill rivals in the securities industry, including
Donaldson, Lufkin & Jenrette Inc. and Goldman Sachs Group LP,
also have funds that can invest overseas.
Lucrative Business
Merchant banking can be a lucrative business. Morgan Stanley
Dean Witter paid $200 million for a stake in Equant NV, the
Netherlands-based co-operator of the world's largest commercial
data network, in 1995. Less than three years later, Morgan
Stanley took the company public and its stake was worth $2.25
billion.
It's not only the returns that make merchant banking
attractive. ''Investment banking business can also come from the
companies the funds invest in,'' said Raphael Soifer, who follows
the securities industry for Brown Brothers Harriman & Co.
Securities firms arrange stock and bond sales, for which
they receive fees. If they have a relationship with the company
through their private equity unit, they are likely to handle the
sales. Willis Corroon needed to sell $550 million of bonds to
repay bank loans that KKR had taken out to acquire the insurance-
broker last November.
Merrill's former European mergers chief Edward Annuziato is
heading the firm's effort, said the people familiar with the
matter. The executive committee has an off-site meeting in the
coming weeks and merchant banking will likely be on the agenda,
though a decision isn't expected then, they said.
Scaling Back
Merrill scaled back its private equity business in 1993
after the high-yield bond market, often used to finance buyouts,
crashed following the collapse of Drexel Burnham Lambert. Lenders
also required buyers to put up more of their own money, reducing
leverage and the potential for profit.
In addition, Merrill was seeking to reduce risk. One way was
to tie less money up in investments that couldn't be sold easily
or quickly. And it was concerned its merchant banking business
put the firm in competition with its corporate clients that might
have wanted to buy companies themselves.
Today, the firm is returning to the business. For about a
year, it's had an emerging markets fund, Merrill Lynch Global
Partners LP, investing in companies. That fund on Friday joined
with Southern Cross Group to acquire Argentina's biggest armored
car service, Juncadella Prosegur Internacional SA.
Merrill has occasionally taken small stakes in U.S.
businesses since 1993, though it hasn't been nearly as active as
it was in the early 1990s.
In the first six months of 1992, for example, Merrill Lynch
Capital Partners took a 74 percent stake in food distributor
Unifax Inc., bought out music-store chain Wherehouse
Entertainment Inc. and acquired United Artists Entertainment
Co.'s movie theater operations.
Analysts warned there are potential pitfalls in Europe.
The competition is fierce, especially for companies worth
$500 million or more. Those are the candidates Merrill is likely
to pursue, partly because the firm wants to invest in
corporations that can become clients for stock or bond
financings, said the people familiar with Merrill.
''If Merrill is going to act as principal, Europe is a very
interesting place for them to make a lot of money -- whether they
execute it well is another matter,'' said Holland. ''There will
be plenty of losers, but the winners will be huge.'' |
