Merrill Lynch chief bullish on firm's global future

November 13, 1994|By Bloomberg Business News

NEW YORK -- Merrill Lynch & Co., already the nation's largest securities firm, is pulling away from the Wall Street pack as it heads to the turn of the century.

Criticized 10 years ago as bloated and poorly managed, Merrill now dominates Wall Street. The next-largest securities firm, Smith Barney Inc., invests about $58 billion for its customers -- little more than a third of the $167 billion that Merrill invests for its clients.

Merrill Chairman and Chief Executive Daniel Tully is confident his firm will remain the industry leader -- so confident that he cites "arrogance and complacency," not other financial-services firms, as its biggest threats. "We don't wake up in the morning thinking about Smith Barney," Mr. Tully said.

If Mr. Tully has his way before he retires in three years, Merrill will lengthen its lead. The firm's equity base -- essential for expansion, borrowing and trading in worldwide markets -- probably will double by the end of the decade from its current $5.7 billion, because Merrill is exceeding its goals of returning 15 percent on its equity each year.

Mr. Tully predicts the firm will control $1 trillion of total customer // assets by the year 2000, almost double the $548 billion it now holds.

Mr. Tully's efforts have paid off for investors. Since Mr. Tully took over in May 1992, Merrill's stock has risen about 60 percent, compared with a 40 percent increase in the Standard & Poor's index group that includes some of Merrill's competitors. It split its stock 2-for-1 a year ago, after it rose above $100 a share, and raised the dividend that it pays on its common stock three times. Merrill is a passive minority investor in Bloomberg L.P., the parent of Bloomberg Business News.

And the firm probably will keep it up, analysts said. "With their strong franchise they will continue to do well," analyst Dean Eberling of Prudential Securities Inc. said. "We are in a world where you have to add value. In underwriting, it means that because Merrill has access to large markets and knows the pricing, it can go to China and raise money in the U.S. for a Chinese oil company."

To be sure, when Mr. Tully became chief executive officer two-and-a-half years ago, he and Merrill benefited from the biggest bull market in bonds in a generation. Not until this year has Mr. Tully had to prove himself capable of making money in a bear market.

So far, he's more than holding his own. Like other brokerage stocks, Merrill's shares have suffered during the past year as interest rates rose, dropping 10 percent in the past 12 months and about 20 percent from its all-time of $102.375 in October 1993.

At the same time, though, Merrill has avoided at least some of the risks that have hurt other firms. Salomon Brothers Inc. lost $547 million, pretax, in the first nine months of the year as revenue from bond trading, underwriting and foreign exchange dried up. General Electric Co.'s Kidder, Peabody & Co. unit collapsed partly because of a lack of internal controls, forcing GE to agree to sell Kidder.

Part of Mr. Tully's approach has been to try to control costs "to make sure you have a bottom line." And he's tried to reduce Merrill's exposure to risky businesses, following investment losses during the early 1990s. For example, Merrill cut back on lending its own money to finance customers' corporate acquisitions.

One way that Mr. Tully will steer Merrill toward its goals is to expand its concentration abroad. By the year 2000, Mr. Tully said, 50 percent of Merrill's revenues will come from businesses outside the U.S., up about 33 percent now. Client assets invested outside the U.S. will double, to 20 percent. By the end of the century, Mr. Tully said, he could imagine a European or an Asian running the firm by then.

For all its strengths, Merrill is not immune to the industry's trading and underwriting ills and its worst slump in four years. Merrill said last month that its third-quarter earnings dropped 36 percent to $232 million, or $1.10 a share, from $359.7 million, or $1.57 a share one year ago.

"No matter how brilliant you are, it's hard to have a soft landing in expenses when the industry slows down," analyst Ned Davis of Oppenheimer & Co. said.

It has avoided the kind of major scandal that has wrecked some firms, but it's had a few problems in the 1990s. It fired some junk-bond employees for improper trading. It placed three senior municipal-bond employees on leave in the wake of a federal probe into the sale of $2.9 billion of New Jersey Turnpike Authority bonds.

In its retail division, more than 100 individuals are seeking arbitration awards over claims that Merrill brokers misrepresented the returns involved in limited-partnership investments.

And there is no guarantee that the firm will perform as well in the future. Congress could impose stricter regulations on derivatives Fidelity Investments could increase its lead as the nation's biggest mutual fund company. Fidelity controls almost $400 billion in assets that it invests for its customers, dwarfing Merrill's $167 billion.

In addition, Merrill still lags Goldman, Sachs & Co. in the eyes of some of its biggest customers -- corporate chairmen -- as the most reliable investment banking firm.

And as Merrill tries to extend its lead in businesses ranging from institutional trading to insurance to certificates of deposit, it must compete against more specialized foes.

Mr. Tully said Merrill is up to the task. "We are a marketing organization," Mr. Tully said.

"We're in a decathlon with great players."

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