Global Best Investment Bank: Merrill Lynch

Also shortlisted in this category:
Deutsche Bank
Goldman Sachs
Lehman Brothers

Making a call on the best investment bank in 2006 is an incredibly difficult process. Investment banks continue to churn out record numbers quarter after quarter. At the same time the definition of what an investment bank is – client adviser, money-spinning prop trading operation, private equity firm, or combination of all three with a lot of other bits and pieces thrown in as well – is becoming less clear.

Who can dispute the fact that Goldman Sachs has had a terrific 12 months? It consistently produces numbers that are the envy of every other investment bank. It continues to have boardroom relationships with major corporations that other dealmakers can only aspire to. It is, in fact, the point of reference for every other investment bank.

What about Lehman Brothers? Euromoney’s investment bank of the year in 2005 has posted an even better performance over the past 12 months. Its M&A franchise is growing fast, notably in Europe, where its overall revenues are up almost 70% year on year. It is hiring rainmakers from many of its major competitors, without losing the distinctive culture that has driven it forward in recent years. It leads in mortgage origination and securitization, the business every bank desperately wants more of.

And look at the merits of Deutsche Bank. It’s the capital markets machine that no one else can match. The bank is a world leader in debt capital markets, derivatives, risk management and foreign exchange. Other banks envy its ability to innovate.

Stan O’Neal has put Merrill Lynch back at the top

How Stan O’Neal transformed Merrill Lynch

The leader and his team

But the award this year goes to a different firm. It’s an investment bank that was a strong contender for the title of best in the world throughout much of the 1990s. A bank that became bloated, a victim of its own success, some might say, and was forced to undergo one of the most savage restructurings in the history of the industry, losing over one-third of its workforce, shutting down entire business lines and removing $7.5 billion of costs from its P&L.

Just three years after the cuts, Merrill Lynch is once again a force to be reckoned with in investment banking. Its revenues in the first quarter of 2006 of $7.9 billion beat previous record revenues from 2000, when Merrill, in its previous incarnation, was a cost-unconscious monster chasing every deal and over-dependent on riding the tech-inspired equity boom that turned out to be a dangerous bubble. Full-year revenues for 2005, at $26 billion, were almost $4 billion up on the previous year.

It is a force once again in the M&A business, where it has scooped many prestigious mandates in the past 12 months, including prominent roles on some of the takeovers and mergers that will define the current boom period when the book comes to be written on it: Procter & Gamble/Gillette, Mitsubishi/UFJ, UniCredit/HVB, Telefónica/O2.

In its 1990s heyday, Merrill dominated the leveraged finance business. By 2003, it was nowhere to be seen, a lowly 12th place in the global league tables. By the middle of 2006, the business – one close to CEO Stan O’Neal’s heart since he ran it in the early 1990s – was back in the big league, a top five player that was only surpassed by the balance-sheet wielding universal banks such as JPMorgan.

Elsewhere many of the stories are encouraging. Merrill is pushing hard in commodities, following its purchase of energy platform Entergy-Koch Trading in 2004. It is trying to build on its traditional strengths in cash equities with new offerings in electronic and portfolio trading, as well as equity derivatives. It is beginning to build up an attractive stable of private equity investments, using its own balance sheet to invest alongside clients in businesses such as Bank of China, Hertz and Debenhams. Late into the prime brokerage game, Merrill Lynch has nevertheless doubled its number of clients and managed balances over the past two years.

And Merrill’s flat organizational structure, allied with compensation schemes that properly encourage managers to cross-sell to clients, puts the firm in a prime position to take advantage of what is now the holy grail in investment banking: using M&A mandates to tap into multiple fee streams. The case of a $2.5 billion acquisition by US energy group Targa Resources last October is a case in point: since acting as sole M&A adviser to Targa, Merrill has provided commitment for the $2.75 billion debt financing, bookrun the $2.5 billion credit facility, plus an issue of $250 million of senior notes, provided energy commodity hedges and co-invested in the deal through its private equity arm.

It’s a vision of what investment bankers want their businesses to look like in the future. The Merrill turnaround story is not complete yet. But the firm deserves recognition for its success so far.

Tags Awards Asia Pacific Awards for Excellence Banking Capital Markets Emerging Europe Emerging Markets Merrill Lynch Middle East and Africa Surveys and Awards

Global Best Investment Bank: Merrill Lynch

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