Competitive Intelligence

The Battle for M&A Marketshare: Merrill Lynch vs. Goldman Sachs, Morgan Stanley, Citigroup and J.P. Morgan Chase

As the mergers and acquisitions market comes back around and Merrill Lynch struggles to recover from its scandal-prone past, it’s putting a big push on recovering marketshare against stronger competitors Goldman Sachs and Morgan Stanley as well as upstarts Citigroup and J.P. Morgan Chase. A Reuters excerpt from a couple of weeks ago describes their progress and ongoing challenges:

Merrill's top brass credits their tireless discussions with corporate executives over the past three years, when few were interested in doing deals. They also point to a fledgling business model that links investment banking more closely with other products.

Still, analysts and bankers - none of whom wanted to be quoted - say Merrill may have trouble hanging onto its remaining top talent. And rivals like Citigroup and J.P. Morgan Chase & Co., which can lure potential advisory clients with their lending prowess, are not likely to go away.

Merrill Chief Executive Stan O'Neal is hammering home his quest for profits, even if it requires ditching certain products, especially those that will not lead clients to buy other higher-margin offerings. And even if it means the company must sacrifice some market share in a particular area.

"Our first metric is profitability," said Greg Fleming, who shares the top post at Merrill's global markets and investment banking.

Still, he said market share does matter. The company expects to be a top 3 player in higher-margin businesses like M&A and in the top 5 across all of its product lines.

"You can't argue you're an expert in something if you're 11th or 12th in the league tables," Fleming said.

Merrill, which reported a record profit on Wednesday, finished 2003 in third place on global announced merger deals, just a whisker behind No. 2 Morgan Stanley. Merrill worked on 16.7 percent of the global merger deals, up from 13.7 percent the year before, according to Dealogic, which ranked Goldman Sachs first.

Merrill's share was still off significantly from 32.4 percent in 1999, when it ranked second behind Goldman, but the company, like other traditional investment banks, has ceded ground to the new breed of superbanks like Citigroup and J.P. Morgan.

Amid O'Neal's deep cost cuts of the past few years and the various scandals that rocked Wall Street, Merrill lost some key talent, including Casey Safreno, the global head of health care banking, and virtually its entire media team.

Fleming and Steve Baronoff, Merrill's global head of mergers, acknowledge they must fill certain holes. They already brought back Victor Nesi to lead media and telecom banking, and have landed AT&T Wireless as a client.

"From an M&A point of view, most of our industry groups are well covered," Baronoff said, although Merrill is looking to hire bankers in countries like France and Germany.

He said Merrill could selectively add coverage bankers, who help handle all aspects of a client's investment banking needs, in the media, consumer and industrial segments.

Former Merrill bankers said, however, that few star bankers have left because opportunities were limited in the depressed merger market. But with more deals in the works, rivals might poach those who remain, since some are still bitter about the rampant layoffs.

Some Wall Street observers were mildly surprised about Merrill's uptick in advisory work because reports in The New York Times and BusinessWeek have indicated that O'Neal sees less value in the mergers business than the retail side and asset management.

Although strategic advisory work accounts for only about 3.3 percent of Merrill's revenues, O'Neal's reported views about investment banking are still perplexing - and disputed internally - since he came up through the banker ranks, while his predecessor, David Komansky, did not.

"Stan, from my point of view on the M&A side, has been a breath of fresh air," Baronoff said. "Stan is very accessible to clients. He has CEO impact."

While Merrill sounds confident about its merger advisory infrastructure, it will have a tougher time warding off external factors, particularly the encroachment of lending heavyweights like Citigroups.

"The traditional banks want to argue that M&A is a brains business having nothing to do with brawn," said one former banker, "but the financial reality for the clients may be that they can't afford to look at it that way, even if it means they're going to compromise the advice they get."

Although Merrill touts its knack for complicated cross-border deals and hostile takeovers, it is also banking on its own brand of one-stop shopping, including help arranging a wide variety of funding options.

For example, it points to its work with British pub company Spirit Amber, which last year acquired Scottish & Newcastle Plc, the nation's largest brewer. Merrill was sole adviser and bookrunner for a secured debt facility, and it contributed equity to the deal.

"Our vision isn't a single product," Fleming said. "Our vision is driven around developing a relationship with a client, where they will turn to us for any form of investment banking and advisory service they're looking for help on."

Still, Merrill Lynch will need to continue to execute to recover its previous standing in the M&A market, as new rivals Citigroup and J.P. Morgan Chase force market leaders Goldman Sachs and Morgan Stanley to fight even harder. Whether Merrill can avoid getting caught in the middle of that battle for market share will depend on their ability to execute according to their strengths and exploit competitors’ weaknesses.

- Arik