Awards for Excellence 2002
Merrill Lynch
Merrill Lynch wins the award for best equities house in recognition of its broad and deep franchise across the product, in IPOs, secondary offerings, sales and trading. In convertibles the firm continues to be the market leader: it still dominates as underwriter in the US, and is a major force in Europe and Asia.
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Merrill Lynch: still dominant in equity, equity- linked and equity derivatives, despite Spitzer |
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There are many in the markets who feel that Merrill Lynch ought not to receive any equities award this year. The broker has, after all, just paid $100 million to settle its battle with New York attorney general Eliot Spitzer, who alleges that Merrill’s equity research analysts covering internet stocks were co-opted or corrupted into issuing false recommendations because of their investment-banking ties. Euromoney considered excluding Merrill Lynch as a result but decided not for several reasons. First, the allegations dealt with events that took place two years ago. Second, Spitzer said he was fighting for individual investors, even though none of them will receive anything from the $100 million Merrill paid – it goes into state coffers. Our awards deal primarily with corporate and institutional clients, and they don’t appear to have reacted adversely to Merrill as a result of the allegations. Third, and most important, Merrill Lynch is not alone in being investigated; most of the major investment banks, and several smaller ones, are being probed by Spitzer for exactly the same reasons, and some have tried – and failed – to settle quietly. Merrill is simply the poster child for an industry-wide problem that corporates, institutional investors – and journalists – have known about for years.
The Spitzer investigation is not all Merrill Lynch has had to deal with in the past 12 months. The firm was forced out of its New York headquarters after the attack on the World Trade Centre. By the time the equity market reopened the following week, Merrill was operating effectively out of the Jersey City office of Herzog Heine Geduld, the Nasdaq market maker it bought two years ago. Once the new-issue market found its feet Merrill was one of the first and largest underwriters: it led some of the first deals, all secondaries, after the attacks in the US (a $68 million 144a deal for Allied Capital), in Europe $105 million (for Cadbury Schweppes), and Asia (a $782 million offering for Singapore Telecom). In the US, in one week at the start of October, the firm lead managed nine secondary and convertible offerings, six of them in the space of 24 hours.
In a year when equity issuance continues to be sluggish, equity trading takes on even more importance. In the US Merrill is the largest trader of New York Stock Exchange and Nasdaq stocks, according to Autex. It’s also the largest trader in Europe and Asia. “Commitment to trading is fundamental to the strength of the business, and we have been increasing our market share over the last few years,” says global co-head Jeff Edwards. “Committing capital and making markets allows our research analysts to have more leverage with institutional investors. And investors want more for their money. Increasingly investors are looking at capital markets ideas to help get liquidity for single stocks. We’ve done a number of transactions where we have built a book to sell a large holding for an investor.” A recent deal was earlier this year when Merrill sold e350 million ($329 million) of a US investor’s stake in Porsche, equivalent to about 7% of the company’s outstanding stock.
Merrill finished third in the IPO league table last year, and this year has underwritten deals for a diverse group of companies, including one of the year’s largest IPOs, the $2.3 billion spin-off from Nestlé of healthcare company Alcon. Merrill was co-lead for one of the year’s most successful IPOs, the $158 million deal for Jetblue; sole lead on one of the few internet deals, Netflix’s $82.5 million IPO; and sole lead on the largest Reit offering for years, the $450 million deal for Heritage Property.
Merrill Lynch’s secondary offering platform has remained strong. One of the best examples of this is in Japan. In May the Japanese government awarded Merrill the mandate to lead manage its $2.3 billion add-on for Japan Tobacco – Goldman Sachs had led the last deal – and that was while Spitzer and Merrill Lynch were still at odds in the US.
Merrill remains the dominant player in equity-linked securities. It is the top underwriter in the US, with a market share in excess of 22%. Merrill’s signature deal in the past 12 months was undoubtedly the $3.75 billion convertible for General Motors in March, the second-largest convertible ever.
Elsewhere, Merrill led the largest Italian convertible ever, a $2.2 billion exchangeable into General Motors stock for Fiat, as well as the largest convertible for a Korean issuer when it launched a $1.3 billion deal for Korea Telecom in December.
In another demonstration of its prowess in combining equity, equity-linked and equity derivatives, it won a competitive tender to work for two Italian banks, Fondazione Cassa di Risparmio di Verona and Fondazione Cassa di Risparmio di Torino. For regulatory reasons, both had to reduce their stakes in Italy’s largest bank, UniCredito Italiano.
Merrill’s solution was threefold. First, the two banks would sell call options to Merrill equivalent to about 4.5% of UniCredito’s ordinary share capital, and thus with a notional value of e1.1 billion ($1 billion). At the same time Merrill launched an accelerated tender offer of UniCredito shares worth e393 million to hedge its options exposure. It sold the block in 17 minutes in a Friday afternoon.
Next Merrill entered into a swap agreement with Mediobanca and then structured and launched a e900 million Mediobanca-UniCredito exchangeable convertible bond incorporating the call options. “We leveraged the entire equities floor to do that deal,” says Ermotti. “This is the type of transaction that leverages the strengths of our equities and banking platforms and separates us from our competitors. It required relationships, creativity, boldness, expertise and, most of all, teamwork.”
Antony Currie
