Since last autumn relentless assaults have been made on almost every aspect of Merrill Lynch's business. Merrill, it was said, had finally fallen victim to overweening pride, and now found itself forced irrevocably towards being subsumed into a commercial bank (Chase Manhattan has long been the favourite candidate). Behind the slide lay a series of mistakes and miscalculations that seemed to affect almost every aspect of the US investment bank's business.
Merrill's response was calm. It still talked to the media, still talked to analysts. And its executives showed they had kept their sense of humour. At the start of June when the firm announced its long-awaited internet strategy for its huge private-client business, chief executive David Komansky's tongue was firmly in his cheek. "We're here today," he began, "to announce the biggest merger in history. Between Merrill Lynch and you, the investing public."
It was an obvious swipe at the merger rumours of recent months but also a clear statement that six months of setbacks and bad press had not quelled the firm's desire, and ability, to continue to grow as an independent institution.
Nonetheless, it has been tough at Merrill of late, remembering the success enjoyed for most of the previous decade. The big questions about the performance and future of the bank began to be asked in late autumn last year, but the mumblings began as far back as November 1997.
It was then that Merrill paid $5.2 billion for Mercury Asset Management, a UK institutional fund manager of great repute whose more recent performance in some high-profile funds left a lot to be desired. Surely that was too high a price to pay? Merrill Lynch Asset Management, the core of Merrill's US franchise, had been having performance problems of its own.
Next was Merrill's foray into Japan. In February last year Merrill hired 2,000 former Yamaichi brokers after their firm went bust. High start-up costs and no revenues to speak of raised questions about the wisdom of the move.
But that was nothing compared to what happened next. Merrill Lynch, bond house supremo in the US since 1987, and in Eurobonds since 1994, lost $894 million on debt and preferred securities and announced its first loss-making quarter in nine years.
The division went into a tailspin for three months and was forced to focus on sorting out its huge bond inventory - reports put it as high as $60 billion - a task that market illiquidity made all the more difficult. Roughly 500 people were sacked from debt markets - just under 20% of the workforce - including more senior managers than the bank had ever lost in such a short time.
Merrill became the prime target in a debate about the merits of full-service brokers versus internet-based discount brokers such as Charles Schwab. Merrill's approach, said its detractors, was outdated, its 14,000-strong broking force a bunch of Luddites opposed to technological changes that might cut their commissions or make them superfluous.
Yet Merrill is still an exceptionally strong bond house. New Mercury investment products have raised over $2 billion in the US since last November, and the brokers - known as financial consultants - are still bringing in over $300 million a day in new assets. The firm's brand name is still strong, it has some talented staff, not least in the bond division, and some criticisms have over-simplified the issues.
Comfortable margin
Full-service broking is not dead. Schwab charges $29.95 to execute a trade for a client on-line, Merrill charges over $100 to do the same trade over the phone, often much more. But there's a huge difference between full-service Merrill, offering advice and research as well as trading, and the mainly trading-only option at Schwab.
"The argument has been made for nearly two decades that with cheap and abundant discount services available, full-service [broking] would soon be extinct," wrote Salomon Smith Barney securities firm analyst Guy Moszkowski in March.
The other side of the coin is that Schwab is operating in a low margin business; an execution-only strategy has its own risks, and Schwab has admitted that to grow its business it has to consider how to offer more services. And last year was a successful one for Merrill's retail brokerage and private-client operations, with new accounts up 30% on 1997.
Overshadowed by the problems in other areas of its business is Merrill's foreign expansion outside of debt products. M&A advisory, for example, always a strength in the US, was only begun in earnest in Europe four years ago. Now Merrill ranks in the top five.
At one point last year it looked as if the momentum might have stopped: "No-one was immune to the market disruption last year," says Justin Dowley, co-head of European M&A. "But that has passed and it now looks more like a blip rather than having any real long-term negative effect on the business." Merrill froze all money for investments in the business for two months last year, but now Dowley is free to continue expanding his business into Europe, especially France, Germany and Italy.
The equity markets business is also moving at a healthy pace. It is now run by Paul Roy, a British banker who with Michael Marks facilitated the sale of their UK brokerage house, Smith New Court, to Merrill in 1995. At $803 million, it was considered by many to be too expensive at the time.
But it has since served as the base for Merrill's non-US expansion in equity markets - Roy's elevation to global head last year is evidence of this. "In four years our business has been dramatically transformed from being US-centric to the point where half of the revenue now originates from abroad," he explains. "Smith New Court was the base for that, but our other acquisitions have built on that."
In research and in secondary trading Merrill is a consistently top performer. In all the analyst rankings it comes at or near the top. If anything is lacking, it is a first-class origination effort. As with other US banks, Merrill has done well out of European privatization, but still feels there is more to be done. "We need to build the origination effort off our secondary trading business more, especially in Europe ex-UK," says Roy. "That's why, for example, we hired Dante Roscini from Goldman Sachs earlier this year. We expect to take two or three years to build effectively."