Merrill Lynch & Co., Inc.

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Merrill Lynch & Co., Inc.

founded: 1914 as merrill lynch & co.

Contact Information:

headquarters: 250 vesey st. new york, ny 10281 phone: (212)449-1000 fax: (212)236-4384 url: http://www.ml.com

OVERVIEW

Merrill Lynch provides brokerage and investment banking services to governments, companies, and individuals throughout the world. Other lines of business include clearing services, retail banking, and insurance. As of early 1998, Merrill Lynch was the largest securities firm in number of brokers and the leading underwriter of U.S. stocks and bonds. Worldwide, it had $450 billion in assets under management, placing it in fourth position among asset managers.

COMPANY FINANCES

In 1997 the company's revenues rose 27 percent to $31.7 billion. Operating margins expanded to 60.2 percent from 57.8 percent in 1996. Net income was up 18 percent to $1.9 billion, and earnings per share were $4.83. Dividends of $.75 per share were paid for the year. In early April 1998 the company's market capitalization was $32 billion.

HISTORY

Merrill Lynch has a long and distinguished history that reflects the evolution of financial markets. In 1914 Charles Merrill set up his own brokerage firm, and in the following year he convinced his friend Edmund Lynch to join him. In the 1920s the firm shared in the general prosperity of the period, and it also expanded by taking over scores of other companies. Merrill foresaw the crash of 1929, and he changed the scale of his company's operations and its investment strategy accordingly. Nevertheless, in 1930 Merrill and Lynch sold the firm's retail business to E.A. Pierce & Co. In 1939 Pierce persuaded Merrill to rejoin him in the retail business. In 1941 the firm merged again; it absorbed Fenner & Beane, the nation's largest commodities house.

In 1958, after several name changes, the firm became Merrill Lynch, Pierce, Fenner & Smith. During the 1960s the firm began to diversify and entered overseas markets, and in 1964 became the first U.S. securities firm with a presence in Japan. In 1968 it entered the real estate business with the purchase of Hubbard, Westervelt & Mottelley. In 1970 it absorbed the New York Stock Exchange's fifth-largest firm, Goodbody & Company, which brought the company new expertise in the areas of unit trusts and options.

In 1971 Merrill Lynch became the second firm to have its shares traded on the New York Stock Exchange. Shortly afterwards, the company adopted the name Merrill Lynch & Co., Inc., which it retains. Its principal operating subsidiary was Merrill Lynch, Pierce, Fenner & Smith. In 1977 Merrill Lynch introduced its Cash Management Account (CMA), which allowed individual investors to write checks and make VISA charges.

In 1980 Donald Regan, who had headed Merrill Lynch since 1968, left the firm to work in the Reagan Administration; Roger Birk became chairman and CEO. In 1985 Merrill Lynch became one of the six foreign firms that were permitted to become members of the Tokyo Stock Exchange, and in 1986 the firm became a member of the London Exchange. After the crash of 1987 the company retrenched and reorganized its operations, but by 1988 it had fully regained its profitability.

In 1991 Merrill Lynch purchased a seat on the Seoul, Korea, stock exchange. In 1995 it bought Smith New Court of the United Kingdom, which significantly enhanced its position in European stock markets. However, that year the company suffered a setback when Orange County, California, went bankrupt after making investments in highly volatile derivatives. Merrill Lynch had been one of the county's main brokers for these securities, and thus was the target of related lawsuits.

STRATEGY

In the late 1990s Merrill Lynch's business strategy focused on expanding its retail business overseas. The firm was already a powerhouse in international investment banking, which provides funds for the activities of global corporations and governments. But Merrill Lynch had made relatively little progress in marketing its numerous financial services to small investors overseas. The markets for selling stocks, insurance, real estate, etc. to individuals were expanding strongly in many countries. In contrast, the U.S. market was relatively mature, and thus the opportunities for further growth were more limited. Moreover, competition in the United States was more intense, with banks, insurance companies, mutual fund companies, planners, and brokers often competing for the same retail (i.e., individual) customers.

Thus Merrill Lynch was buying outright, or taking stakes in, brokerage firms around the world. After purchasing the British brokerage Smith New Court in 1995, it had the largest stock research department in the world. The company also took stakes in brokerage firms in India, Thailand, South Africa, Indonesia, and Italy. Foreign nationals were brought to Merrill Lynch's training center in Princeton, New Jersey, to learn how to sell to small investors. David Komansky, who became CEO in 1997, told Forbes magazine, "Visit our offices, whether it be Thailand, Malaysia, South Africa or Germany, and you will see the same plaques on the wall with those same Merrill principles in the local language . . . After you get past superficial differences, people are basically the same in their needs, wants, and desires."

In early 1998 Merrill Lynch scored a major coup when it took over the failed operations of Yamaichi Securities in Japan. The takeover gave the company a major presence in Japan's retail brokerage industry and access to a market with $10 trillion in personal savings.

Merrill Lynch also has been extremely successful in building its mergers and acquisitions (M&A) business. In 1997 it earned $791 million in fees from M&A transactions, compared with just $184 million in 1993. These operations were extremely profitable, with estimated margins of more than 50 percent. A major factor in Merrill's success, according to Fortune magazine, was that its M&A operation had an unusually capable leader in Jack Levy. Under Levy, M&A staff were reorganized into industry groups that specialized in individual sectors. The move gave the firm an edge in developing investment ideas for CEOs, many of whom were eager to expand their companies through acquisitions in their core businesses.

INFLUENCES

When Charles Merrill came to Wall Street in 1914, it was dominated by a small number of rich businessmen from the Northeast. Charles Merrill realized that there was vast potential for financial markets in catering to the needs of the growing number of middle-class Americans. As early as 1940 Merrill Lynch promoted itself as a "department store of finance," and clients were urged to research their financial options. While none of this would be unusual in the 1990s, in the 1940s it made the firm distinctive.

Throughout the bull market of the postwar period and the 1950s, Merrill Lynch continued to be an innovator and an information provider. It built a permanent Investment Information Center in New York's Grand Central Station, where it distributed educational brochures. In a pioneering move, the company even offered investment seminars for women. These and similar tactics eventually made Merrill Lynch the best-known firm on Wall Street.

During the 1960s Merrill Lynch began to diversify and expand. It entered the fields of real estate financing, asset management, and government securities. It also solidified its reputation as a leading investment banker. While the firm was better known for its services to individuals, it was by no means a stranger to the business of financing entire industries. In the 1910s Merrill financed the emerging chain store industry, and Charles Merrill himself was a founder of Safeway.

In the 1970s Merrill moved into international banking and life insurance. To meet the changes in an increasingly complex financial marketplace, Merrill formulated a strategy of offering "a diversified array of securities, insurance, banking, tax, money management, financing, and financial counseling." The creation of the Cash Management Account (CMA) in 1977 was a big step toward enacting this strategy. This unique account allowed individual investors to write checks and make VISA charges against their money market accounts. The banking industry raised legal challenges to stop it, but to no avail. The CMA was one of the most important steps Merrill took to attract and retain the allegiance of the individual investor.

FAST FACTS: About Merrill Lynch & Co., Inc.

Ownership: Merrill Lynch is a publicly owned corporation traded on the New York Stock Exchange and other stock exchanges throughout the world.

Ticker symbol: MER

Officers: David Komansky, Chmn. & Chief Exec. Officer, 58, 1997 salary & bonus $7,729,000; Herbert Ellison, Pres. & Chief Operating Officer, 54, 1997 salary & bonus $6,140,000

Employees: 56,600

Principal Subsidiary Companies: Merrill Lynch's principal subsidiaries include Merrill Lynch, Pierce, Fenner & Smith Inc.; and Merrill Lynch Asset Management.

Chief Competitors: The company's financial activities are wide-ranging, and the pace of consolidation in the financial services industry is accelerating. Thus Merrill Lynch finds itself competing with a broad and changing group of financial services firms. Its rivals in the securities business include: Bear Stearns; Travelers Group; Charles Schwab; Morgan Stanley Dean Witter; Goldman Sachs; Paine Webber; Prudential; and Quick & Reilly.

Merrill shared the rollercoaster fortunes of other Wall Street firms during the 1980s. In 1985 profits reached a record high $453 million, but the crash of 1987 resulted in wage freezes and layoffs. But profitability recovered quickly, and Merrill recorded $463 million in profits in 1988. It also edged out Salomon Brothers that year for the distinction of America's largest underwriter.

CURRENT TRENDS

Historically, most securities firms specialized in either institutional business, which means helping to finance large corporations and governments; or retail business, which means selling stocks, bonds, and mutual funds to the individual investor. However, as the individual investor grew in importance in the 1990s, institutional brokers and retail brokers considered combining their operations. For example, in 1977 Morgan Stanley, a brokerage that had primarily served institutions, merged with Dean Witter, a retail broker. Merrill Lynch, on the other hand, was unusual in that it was already a power-house in both institutional and retail markets. In 1996 Merrill Lynch was ranked among the world's largest underwriters of stocks and bonds, which finance large organizations. It also had the largest U.S. sales force for individuals, with 13,000 brokers serving 4.5 million households. In this respect, Merrill Lynch was well positioned to succeed in the new competitive environment.

Nevertheless, Merrill Lynch faced substantial challenges. Its initial public offering (IPO) business had lost some ground. The firm still faced bad publicity and possible legal action stemming from its role as the main investment bank of Orange County, California, which declared bankruptcy in 1994. Most importantly, while the company had pioneered service to the individual investor, so-called discount brokers were allowing the small shareholder to trade stocks for less. Traditionally, discount brokers had not offered small investors the extensive research services that Merrill Lynch provided. But this was changing, too, and firms such as Charles Schwab were offering not only low prices but substantial financial information and advice.

The aforementioned trends had been accelerated by the advent of online trading on the Internet, with firms such as E*Trade offering to trade stocks at a small fraction of Merrill Lynch's rates. Merrill Lynch planned to offer online trading in the first half of 1998, beginning with customers who held Asset Power and Financial Advantage accounts (both of which charge annual fees to manage assets). Earlier Merrill Lynch had stated publicly that it did not believe most of its clients wanted to trade online. Nonetheless, the success of online trading by rivals charging less put pressure on the firm to offer comparable services.

Late in 1997 Merrill Lynch acquired Mercury Asset Management, the leading independent asset management firm in the United Kingdom, for approximately $5.3 billion. Mercury's clients included 5 of the 10 largest global pension funds. This acquisition by Merrill Lynch paled, however, in comparison to the planned merger of Citibank and Travelers Group (containing the Salomon and Smith Barney brokerages) announced in April 1998. That new firm, to be called Citigroup, would have shareholders' equity of $44 billion, versus just $8 billion for Merrill Lynch. Some analysts wondered whether Merrill Lynch would now agree to merge with a large commercial bank, such as Chase Manhattan. Other observers, however, thought that the firm would continue its strategy of, as Patrick McGeehan stated it in the Wall Street Journal, "building a global financial-services franchise through internal growth and the occasional acquisition."

CHRONOLOGY: Key Dates for Merrill Lynch & Co., Inc.

1914:: Founded
1930:: Sells the retail part of the business to E.A. Pierce & Co.
1939:: Merges with E.A. Pierce & Co.
1941:: Absorbs Fenner & Beane
1958:: Company is renamed Merrill Lynch, Pierce, Fenner & Smith
1964:: Becomes first U.S. securities company with a presence in Japan
1968:: Purchases Hubbard, Westervelt & Mottelley
1970:: Absorbs Goodbody & Co.
1977:: Introduces Cash Management Account
1985:: Becomes a member of the Tokyo Stock Exchange
1986:: Becomes a member of the London Stock Exchange
1995:: Buys Smith New Court
1998:: Becomes largest securities firm in number of brokers; takeover of Yamachi Securities

GLOBAL PRESENCE

As previously noted, in 1997 Merrill Lynch was striving to become a truly international firm in both the institutional and retail markets. Around the world, Merrill Lynch was opening new offices and joining local stock exchanges. Most notable was the takeover in 1998 of the retail operations of Yamaichi Securities in Japan. In 1996 Merrill's joint venture, PT Merrill Lynch Indonesia, was granted a securities license and joined the Jakarta Stock Exchange. Its acquisition of Smith New House of the United Kingdom greatly strengthened Merrill Lynch's presence not only in Europe, but in Asia as well.

EMPLOYMENT

The corporate culture of Merrill Lynch is distinguished by its teamwork and what Forbes magazine has called a "common-man style of management." Many of the big securities firms employ a "superstar" system that emphasizes brilliant, individual performance. Many of their employees are recruited from prestigious Ivy League schools. In contrast, Merrill Lynch CEO David Komansky was a dropout from the University of Miami who started work as an electrician. His father was a postal worker. He enjoyed watching the New York Yankees and going to horse races, rather than playing polo or tennis. But in 1994 he steered the firm through a disastrous bond market and kept it profitable, while many competing firms lost money.

While no Wall Street firm is a model of teamwork, Merrill Lynch appears to have more team players than other firms. Notably, bonuses at the firm depend more on the profitability of the entire company than individual performance. Moreover, Merrill Lynch's financial planners (as its brokers are now called) are encouraged to work in teams in which each specializes in a different area of financial services, such as stocks or trusts.