Merrill Lynch has agreed to purchase San Francisco's First Republic, a bank that specializes in mortgages on luxury homes, for $1.8 billion. The acquisition will be Merrill's biggest in almost 10 years. The offer, which values First Republic at $55 per share, amounts to a 44% premium to First Republic's Friday closing price of $38.30. Merrill will pay half in cash and half in stock. The acquisition is designed to give Merrill Lynch's brokerage business access to wealthy private investors and coincides with CEO Stanley O'Neal's desire to bolster Merrill's ability to supply the banking needs of small business owners. Analysts view the purchase price, which is 24x Street estimates for First Republic's 2007 earnings, as high in view of the bank's relatively slow projected growth over the next two years. The acquisition is also perceived to be risky on the heels of Merrill's acquisition earlier in January of a subprime mortgage business, First Franklin, which the brokerage purchased from National City Corp. First Republic shares leaped 40% to $53.63 on the news while Merrill shares fell 2.3% to $92.39.
• Sources: Wall Street Journal, Bloomberg
• Related commentary: Merrill Lynch Boosts Q4 Profits by 68%, CEOs Speak: Merrill Lynch, Citigroup and E*Trade, Barron's Stocks for a Wealthy America. Conference call transcripts: Merrill Lynch Q4 2006
• Potentially impacted stocks and ETFs: Merrill Lynch & Co., Inc. (MER), First Republic Bank (NYSE:FRC). Competitors: Greater Bay Bancorp (GBBK), JP Morgan Chase & Co. (NYSE:JPM), UnionBanCal Corp. (UB), Goldman Sachs Group Inc. (NYSE:GS), Morgan Stanley (NYSE:MS). ETFs: iShares Dow Jones US Broker-Dealers (NYSEARCA:IAI), Financial Select Sector SPDR (NYSEARCA:XLF), Vanguard Financials ETF (NYSEARCA:VFH)
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