Banking M&A to Accelerate in Six Months
Merrill’s Fleming Says Banking M&A to Accelerate in Six Months
By Bradley Keoun and Christine Harper
May 30 (Bloomberg) — The financial industry will be reshaped by a “significant pickup” in takeovers when stronger banks emerge as acquirers as soon as the end of this year, according to Merrill Lynch & Co. President Gregory Fleming.
Describing the financial markets as the most challenging in his 16-year Merrill career, Fleming said in an interview yesterday in New York that he expects a “strategic repositioning of the industry and a lot of companies within it,” similar to the pattern that emerged after the savings and loan debacle of the 1980s, when more than 1,000 U.S. thrifts failed.
“This doesn’t begin until you have a fairly broad cross- section of healthier financial institutions — in other words, buyers — that are positioned to actually move on a major deal,” Fleming said. “I think we’re looking at the beginning of this probably in six to nine months.”
Purchases the size of JPMorgan Chase & Co.’s takeover of Bear Stearns Cos. and Bank of America Corp.’s pending acquisition of Countrywide Financial Corp. are unlikely to be matched for now because potential acquirers have been weakened by the credit- market contraction, Fleming said. He helped lead the Merrill bankers who advise financial institutions before being named co- president in May 2007 and sole president earlier this year.
Carrying a black and white notebook with his name and the phrase “key business issues” scrawled across the cover, Fleming, 45, discussed Merrill’s plans for retaining top employees, a potential investment in the Middle East and his concerns that commodities markets may be overheated.
`Constructive Environment’
Merrill, the third-largest U.S. securities firm by market value after Goldman Sachs Group Inc. and Morgan Stanley, has reported three consecutive quarterly losses because of $37 billion in writedowns on debt instruments such as collateralized debt obligations. The firm’s shares have dropped 18 percent this year after declining 42 percent in 2007. All three companies are based in New York.
Since the credit crisis began last year, banks and brokers have taken $382 billion of charges and credit losses, and raised $271 billion in capital, according to data compiled by Bloomberg.
“The next couple of quarters will be challenging” for the markets and the financial industry, Fleming said. “Then we start to see a more constructive environment towards the end of the year,” driven partly by growth in overseas markets such as China, India, Russia, Brazil and the Middle East.
John Thain, a former Goldman president, stepped in as Merrill’s chief executive officer in December, after Stan O’Neal was forced to resign. Fleming is a member of the 11-person management committee made up of Merrill veterans and Thain’s recent recruits, including Thomas Montag, a former Goldman executive hired to run sales and trading.
Middle East
Thain, 53, “has brought in some new talent, particularly in areas where we need it, and he’s levered this strong existing talent that he has” within Merrill, Fleming said. “So we’ve got a blend of the old and the new, which is precisely what I thought he would do when he came on board, and what I hoped he would do.”
Fleming acknowledged the difficulty of retaining top traders and bankers in a year when revenue is down. While an increasing portion of compensation will be paid in Merrill stock, the firm is “committed” to paying talented employees competitively, he said.
“We need to do that, John knows that, the board knows that,” he said. “We’ll continue to do that more and more with stock that links the `one firm’ concept, and that vests over time and forces people to think about the firm and its performance over a longer period of time, not just their individual contribution.”
Investments in Brazil and India have helped to fuel overseas growth, Fleming said. The firm also wants to “reinforce” its presence in the Middle East to court government-run investment funds, he said.
`Make a Move’
“At some point you’ll see us make a move there,” Fleming said.
Merrill’s wealth management business — the biggest of its kind in the U.S. with more than 16,000 financial advisers — should be closely integrated with the firm’s investment-banking businesses in less-developed regions such as Latin America, where many of the biggest companies are privately owned, Fleming said.
“In places like Brazil, Russia, China, India, the wealth is often in the hands of families, and oftentimes the best relationship with the family is with an investment banker who’s done a deal for them,” he said. “What we’re trying to do is get the investment banker to help us generate the wealth management business.”
Merrill yesterday named James Quigley, a 25-year veteran of the firm, to oversee integration efforts in Latin America and Canada.
Fleming said he was watching the boom in commodities prices skeptically. The commodities market may be experiencing some of the same euphoria that swept equities in the late 1990s and the credit markets up until the middle of last year, he said.
“I’m hearing a lot of talk about how supply and demand in commodities is not necessarily what we should be looking at,” he said. “Boy, I’ve heard that twice before in less than a decade.”
Merrill owns a passive, 20 percent stake in Bloomberg LP, the parent of Bloomberg News.
To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.
Last Updated: May 30, 2008 00:01 EDT
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