Bull gets its horns in new takeover deal

The thundering herd has charged again, less than a year after BlackRock, although this time the deal is more explicitly a domestic US private client initiative. The bull’s $1.8bn (e1.36bn) purchase of San Francisco-based First Republic Bank is based on an offer of $55 in cash and stock per First Republic share, which represents a 44 per cent premium over market valuation at the time the deal was announced. Based on current market valuations, the total price for First Republic is almost 24 times last year’s earnings. It is worth noting, however, this transaction price is in line with the acquisition of US Trust by Bank of America in late-2006. Nonetheless, although this might be seen as initially reassuring in so far as the two deals are relatively similarly priced, it is a fair comment among many analysts that neither may represent good value. Significantly, the acquisition of First Republic, which has a specialist reputation in both investment management and mortgages for wealthy individuals, has some echoes to the HSBC Group deal for Household International in 2003. While it was a much larger deal in absolute terms set at $16bn primarily in HSBC stock, around $1.1bn was paid out in cash for Household preferred stock. Intriguingly, First Republic will operate as a stand alone subsidiary of Merrill Lynch, while also becoming part of its global private client division. The entity will retain its brand integrity for the time being. The business has assets under management and administration of $16.4bn at end Q3, 2006. The bank has a loan book of $7.6bn and $7.9bn of deposits. Thus the total business amounts to $31.8bn across all lines. The significance of the deal was that HSBC also considered Household would provide it with a major plank into the US market for credit and loans. Many in the bank considered it would add value to the private banking, to some degree. In the case of Merrill’s recent swoop, First Republic is viewed as likely to generate synergies between different lines of business for HNW clients – effectively spanning the asset and liability spectrum. However, the ability to achieve this cross-selling reality has been met with initial scepticism from the market. Most point to the fact that it is not in the culture of the Merrill Lynch private client sales force in the US to actively seek out any cross-selling initiatives without compelling incentives. These have not yet been stated. In the bank’s defence the ink on the deal is still drying. Further, the deal is not initially structured to foster full integration as the two businesses retain their separate strategic agendas and business identities. Sebastian Dovey is managing partner at wealth management strategy think-tank, Scorpio Partnership

Dovey: First Republic stand alone