Big buyout lands Merrill Lynch in loan field where it was an also-ran
Just a month ago, Merrill Lynch & Co. announced huge layoffs - a major restructuring in the face of a $32.8 million second-quarter loss. So it came as a bit of a surprise when the nation's largest securities firm announced it would become even larger. For $97 million in stock, Wall Street's behemoth plans to swallow up a solid portion of Becker Paribas Inc., a leader in commercial paper.
Merrill Lynch chose to buy now because Becker's parent company, Compagnie Financiere de Paribas, hung out a ''for sale'' sign that could not be ignored.
''It's a sweetheart deal,'' says Perrin H. Long, an analyst at Lipper Analytical Services Inc. ''They're paying $100 million to acquire revenues of $ 180 million.''
Merrill Lynch will bring into its capital-markets fold some 250 to 300 of the 2,000 Becker employees. Those employees represent the cream of the crop handling corporate finance, debt securities, and commercial paper at Becker, according to a Merrill Lynch spokesman.
Commercial paper is a short-term loan (60 days or less) issued by a corporation or municipality and typically sold to banks, pension funds, and insurance firms.
Merrill Lynch, by its own admission, was weak in this trading area. Goldman, Sachs & Co. is considered the leader in issuing commercial paper, and Becker held the No. 2 slot. With this deal, Merrill Lynch will squeeze into the top spot.
In terms of future earnings, commercial paper may be a fine crop to be cultivating.
''The growth in commercial paper has been outstanding - it's been at 50 to 60 percent for the last couple of years,'' says Allan Sinai, chief economist at Shearson Lehman/American Express. Demand is high because of the inverted yield curve, he says. That is, because of uncertainty about where the economy and interest rates are headed, the cost of short-term debt instruments (such as commercial paper) has been lower than long-term debt issues.
''Merrill Lynch is adding employees in an area that should be very good for the next few years...,'' Mr. Sinai says. ''Business is planning to spend much more than cash flow allows. There is a good-size gap between cash flow and outlay.''
Since the deal involves no cash, analysts do not expect the purchase to hurt earnings. Merrill Lynch is trading 3.15 million shares of stock (now selling at about $31) for Becker. Of that, 315,000 of the shares are slated for Becker managers making the jump to Merrill Lynch. Nor is this transaction expected to dilute the per-share revenues of current Merrill Lynch stockholders.
As Perrin Long at Lipper calculates: ''For the last 12 months as of June, Merrill Lynch revenues per share stood at $56. So 3.15 million multiplied by $56 equals $177 million. And they're picking up $180 million in revenues - so there's no dilution.''
The sale makes Becker Paribas's parent company the largest shareholder of Merrill Lynch stock. But more important from the standpoint of the French parent , it ends a less-than-lucrative foray into the US securities business.
Paribas and a British firm bought A. G. Becker & Co. in 1974. According to press reports, earnings suffered as the two owners feuded for control over the firm until last year, when Paribas bought out its partner, S. G. Warburg & Co. But in the last nine months Becker Paribas was estimated to have lost from $50 million to $80 million.
''Paribas got fed up with trying to make Becker into a going concern,'' Mr. Long surmises. ''We all have to cut our losses sometime.''
Merrill Lynch does not plan to purchase all of Becker Paribas. The fate of the remaining retail equity brokerage business is as yet in limbo. Either it will be bought out by current managers or sold to another firm. Under the first option, the new company plans to employ 800, which leaves some 900 workers unaccounted for in the buyout plans.