Merrill Lynch: The secret of Salt Lake City

Once branded the internet dullard, Merrill Lynch is on the offensive. More than a decade after the brokerage firm bought a bank in Utah, it’s launching a nationwide retail banking operation, based on the internet, and paying money-market rates on insured deposits. That, and its plans for a banking and investment-services joint-venture with HSBC, may take its head off the merger block.

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Bond (left) and Komansky: aiming to go on-line to serve the "mass affluent"

Listening to Dave Komansky speak was a little distracting. Each time the CEO of Merrill Lynch pronounced the initials "HSBC" it was as if Benny, a character from the old US cartoon series Top Cat had jumped into his larynx. "Okay TC" was Benny's catchphrase - laced with the accent of the Bronx where Komansky grew up - whenever he agreed, as he usually did, with his feline boss.

But Komansky is no stooge - quite the opposite - and no cartoon character, although the trials and tribulations of Merrill over the past two years might make for a great show. Back in mid-1998 Merrill Lynch was king of the hill in investment banking, but was increasingly under pressure in retail broking - its cash cow - to respond to the rise of leading discount broker Charles Schwab. Komansky and John "Launny" Steffens - until recently head of the private-client business - had both made disparaging remarks about the role of the internet that had come back to haunt them. Despite similar problems at Salomon Smith Barney and PaineWebber, it was Merrill that landed the tag of internet dullard.

Internet initiatives
This year, though, Merrill has announced two new ventures. If successful, these could restore its image as a market innovator, and put it at the leading edge of retail e-finance. Last month's announcement of a joint venture with HSBC to create an ex-US banking and investment services company was high profile. But two months earlier, Merrill had quietly let it be known that it was to revamp its cash management account (CMA), first set up in the 1970s, and begin offering federally insured deposits.

And this on the heels of evidence that its response last June to the rise of online trading is paying off. Until then customers could find themselves paying up to $400 to trade stocks, as opposed to $29.95 at Schwab. That was a fat premium. But changing it risked alienating its financial consultants - Merrill's term for its brokers - while not to do so risked losing business fast. So Merrill came up with a two-tier structure: to abandon the high fees for single trades in favour of an annual fee of $1,500 for unlimited trading and access to the FCs and the company's research, and a discount online service of $29.95 a trade. In the first quarter of 2000, assets in the former had risen 21% to $203 billion, and in dedicated online accounts from $300 million to $2 billion.

Having first proved that it is able to defend the turf its founder, Charles Merrill, laid in the 1920s, the broker is now going on the offensive.

Both ventures, the revamping of the CMA and the joint venture with HSBC, mark Merrill down as the first mover, and an innovative one, taking advantage of new regulations, new technology and new business models faster than its competitors. It's virtually impossible to decide which of these two announcements is the more groundbreaking: the domestic announcement, because it has the potential to solve the growing dilemma for US brokers and investment banks of a lack of a strong, broad capital base long enjoyed and exploited by the likes of Chase Manhattan, or the overseas adventure, because it will use a completely new model to break into a new and rapidly growing market.

Each of the two institutions will commit $500 million over the next five years in 21 countries to build a combined banking and investment services company for what HSBC Group chairman Sir John Bond so delicately terms the "mass affluent". That is those with, or likely to have in the near future, between $100,000 and $500,000 to invest.

It will be predominantly an online offering, with some branches and call centres, but it is aimed at those who want to make informed investment decisions for themselves without using a private banker or a financial consultant. It's a model Merrill rejected until last year. The two partners expect to be turning a profit within five years.

The joint venture is a significant departure for Merrill Lynch which has been aggressively building through acquisitions since 1995, when Komansky was president and COO (he became CEO a year later). Merrill has made 19 significant acquisitions, including Smith New Court and Mercury Asset Management in the UK, the staff, assets and real estate of defunct Japanese broker Yamaichi, and Canadian broker Midland Walwyn.

HSBC is no different, having just won the battle to buy Crédit Commercial de France, buying private banking heavyweight Republic New York Corporation last year, and buying various institutions in Asia and Latin America.

So is this a case of the old leading the way to the new world of banking? A big hint that acquisitions are dead? Not completely. Neither institution could have participated in the new venture had it not been for all the acquisitions it had made; nor does the joint venture seek to limit either's ability to continue to acquire. And the mass affluent sector is one that has not been adequately covered. It fell in the gap between the variety of full and discount broking services and private banking for high-net-worth individuals.

A hard act to match
Both HSBC and Merrill could have tried to go it alone, as others are planning to do. But Merrill, despite its CMA in the US, has no experience in banking globally, and HSBC's retail broking is no match for Merrill's. So instead, with the help of technology, the two are able to combine their complementary expertise and geographic presence and their brands without having to get into the destructive processes of a full-blown merger.







James Gorman

By acting first the two have pretty much cornered the best of the market. In terms of product offerings and geographic coverage the two combined are hard to match, if not impossible. "At a stroke this makes us major players, if not the major player, in global financial e-commerce," claims Bond.
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Merrill Lynch: The secret of Salt Lake City

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