If press reports out of the UK and in Hong Kong are anything to go by, a takeover of Merrill Lynch [MER] by HSBC [5] looks a done deal. Akin to a pair of lovers that have undergone a long and steady courtship, the respective families are now only waiting for the wedding date to be set.
In this light, the recent decision by HSBC to ask shareholders to approve a 43% increase in its authorized share capital to $7.5 billion and give Directors the power to issue up to 1.9 billion new shares, equal to approximately 20% of its issued share capital, was viewed in most quarters as an engagement to become engaged. The exact working of it in the shareholders’ circular stated, "The need for such an issue of shares could arise, for example, in the context of a transaction (such as the acquisition of a company) which had to be completed speedily.”
Merrill Lynch and HSBC certainly seem a match made in heaven with very little overlap in existing operations. For HSBC, the thing Merrills brings to the table is its strength in the US investment banking industry, an area where HSBC, despite its global ambitions, has been lacking. History has shown that the investment banking side of Wall Street has been a notoriously hard nut to crack for non-US firms. But it is also a place where you have to be to be considered a player.
Merrill Lynch and HSBC certainly seem a match made in heaven with very little overlap in existing operations. |
The flip side of the coin has Merrills gaining from HSBC’s global presence, its footprint around the world and particularly in Asia where Merrills has long been underrepresented. Moreover, Merrills is strong in research while HSBC offers outstanding distribution facilities. A combined entity would present numerous cross-selling opportunities in the investment banking, asset management and insurance operations to both retail and institutional clients.
This is the model that has been developed so well by Citigroup [C], the largest financial services company in the world. It combines the muscle of a huge financial conglomerate with a strong retail presence. A merger between HSBC and Merrill Lynch at current prices would result in a $200 billion company and leave the combined entity trailing only Citigroup’s market capitalization of $250 billion in the league of financial services superhouses.
The possible longer-term tie up between Merrills and HSBC was signalled in April 2000 when the two entities announced a $1 billion joint venture to create an online wealth management supermarket for banking and investment products targeting affluent customers outside the US. The main offerings are online investment and banking services allowing customers to buy and sell UK and US shares, hold cash accounts in different currencies and borrow against their portfolios.
Merrill Lynch HSBC went live in the UK on 8 May 2001 after slashing the minimum level of investable cash required to qualify for the service from ú60,000 ($85,164) to just ú10,000, effectively widening the potential customer base it calls the “mass affluent”. The service has been operating in Australia and Canada for just under a year.
Predictably, neither Merrill Lynch nor HSBC is willing to comment. HSBC has stated that its request for an increase in share capital is routine prudent housekeeping. It added that it has not sought to increase its share capital for nine years. Merrills stated that it does not comment on speculation.
Meanwhile, some analysts in London and the US are less certain that the market talk has got it right, at least for the time being. They cite a number of obstacles that may prevent immediate-term wedding bells. Culture is one main difference. Merrill Lynch has always prided itself as being a part of Americana. Chairman David Komansky has been quoted as saying that Merrill Lynch, whose corporate logo is a bull, is as American as apple pie. It was also the first stockbroker to offer personal services, and co-founder Charles Merrill is known as the man that brought Wall Street to Main Street.
Meanwhile, some analysts in London and the US are less certain that the market talk has got it right, at least for the time being. |
From HSBC’s point of view, current uncertainty in the financial markets would make it hard to justify to shareholders that the benefits of a bid for Merrills would outweigh the risks, particularly as any bid would entail a premium price to take into account the strong Merrill Lynch brand name. A more thorny issue for the Anglo-Chinese concern would be giving up seats on the Board to outsiders, something that Merrills would demand.
However, most market observers agree that on a longer-term horizon, Merrills and HSBC present a good fit. But in some circles an alternative theory has been bandied about.
Mark Matthews, chief strategist for Standard and Poor’s (S&P), writing in Asia Market Insight, throws out the possibility that HSBC could possibly be on the prowl for one of the small banks in Singapore.
His theory is supported by last month’s comments by HSBC chairman David Eldon calling for reciprocity in banking regulations between the Island State and Hong Kong (i.e. allowing Hong Kong banks to come to Singapore). These comments were made just after the announcement that Dao Heng Bank [223] would be acquired by DBS Group [SI.D55]. The response from the Monetary Authority of Singapore (MAS) was swift. MAS managing director Tharman Shanmugaratnam initially said that this was unlikely to happen. Then MAS chairman and Singapore Deputy Prime Minister Lee Hsien Long came out to say that it might be allowed after all.
Winston Siay, S&P regional banking analyst, says that of the big four Singapore banks, he likes Overseas Union Bank [SI.O05] best on valuation terms. That said, S&P does not rule out the possibility that HSBC could takeover a much bigger Singaporean target such as Overseas-Chinese Banking Corporation [SI.O04] or United Overseas Bank [SI.U11].
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