Wall Street giant sees the deal deepening its private-banking capabilities. Merrill Lynch has agreed to pay $1.8 billion for San Francisco-based First Republic Bank, a prestigious private-banking firm focused on high-net-worth individuals and their businesses. Merrill says the transaction -- and the subsequent extension of First Republic's geographic base from its present, and mainly Californian, footprint -- will enhance its own wealth-management capabilities.

"We expect our entire private-client organization to benefit from [First Republic's] outstanding history, excellent credit and lending capabilities and its experienced management team," says Robert McCann, head of Merrill's Global Private Client business. "First Republic's strong culture of client focus and service sets the standard for excellence in the private-banking industry and is consistent with Merrill Lynch's mission and principles."

Grab and grow

Merrill's motivation for acquiring First Republic is twofold. First, it's simply a matter of acquiring "many more high-net-worth clients," according to Elizabeth Nesvold, a managing director with New York-based investment bank Cambridge International Partners. Second, and perhaps more profoundly, the wirehouse is keen to enhance its existing private-banking capabilities. "First Republic is a pretty aggressive bi-coastal private bank with a fine reputation," says Nesvold.

And, as if in recognition of First Republic's strong brand and track record, Merrill says the bank will keep its name, its management structure and something Merrill calls its "client and community focus."

At the same time, Merrill it will pump money and other resources into First Republic "to replicate the firm's success in key markets across the country and to benefit from its deep banking expertise," says McCann. "We look forward to supporting First Republic's further expansion with additional capital and a greater range of investment products, advice and services."

Careful there

Merrill is also looking to enhance revenue and earnings growth "by cross-offering products and services" between First Republic and its own private-client business.

Merrill's plans to cross-sell to First Republic clients raises red flags for one observer. Merrill went down that road, and stumbled, when its home-grown Wealth Management Services Group -- a high-touch, broker-team program founded in 2001 -- failed to catch on an "open architecture" provider, mainly because it was under pressure to be a conduit for proprietary products and services, according to a wealth-industry observer who asked not to be named in this report.

But First Republic's founding president and CEO Jim Herbert seems little worried by such considerations, describing the tie-in with Merrill as a means "to further grow First Republic and offer even more world-class wealth-management products and services."

First Republic was founded in 1985. It provides private- and business banking services as and offers trust, brokerage and investment-management services, mainly to affluent business owners and their enterprises. In addition, says Merrill, First Republic has "particular expertise in luxury home lending."

Echoes

Besides its San Francisco base, First Republic has offices in Portland, Ore., Seattle, Las Vegas, Greenwich, Conn., New York and in the Californian centers of Silicon Valley, Los Angeles, Santa Barbara, Newport Beach and San Diego -- all of them "in markets with large concentrations of high net-worth-individuals," Merrill notes in a press release.

Nesvold sees parallels between Merrill's plan to acquire First Republic and Bank of America's $3.3-billion acquisition of U.S. Trust from Schwab, announced late in November 2006. "These are both big, but strategically focused, deals aimed at enhancing certain aspects of [the buyers'] high-net-worth offering," says Nesvold. "In both instances, it's a matter of acquiring what the buyer might be hard pressed to build successfully de novo."

In a similar deal -- though perhaps rather more a combination of equals -- the Bank of New York recently agreed to acquire Mellon Financial, in part to tap into an impressive private-client pipeline Mellon has built up over the past 12 years through pin-point acquisitions of its own.

Alois Pirker, an analyst with the Boston-based consultancy Aite, agrees with Nesvold. "Build or buy is the question in the wealth-management industry today," he says. "The strategy of the big firms seems to be to grow organically where possible, but to buy where ever there is a franchise that allows making a leap forward."

Perhaps in keeping with its size and clout as a Wall Street mainstay, Merrill is a force on the M&A landscape. It sold its $544-billion in assets investment-management unit to Blackrock last year in the second-biggest deal of its kind. (The Bank of New York's acquisition of Mellon rates as the biggest.) Late in 2005 it bought AXA Financial's Advest subsidiary. Other recent grabs include pieces of various hedge funds of funds and a couple of emerging-market wealth firms.

Merrill says it expects to complete the First Republic transaction by the end of September 2007. -FWR

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