Wednesday, January 31, 2007

The rich serving the rich While banking acquisitions have been hot for years, one type of deal has been getting ever hotter — buying specialty private banks that are aimed at serving the ultra-rich, a cohort whose money is piling up, thanks to US tax policy and executive bonuses. Such institutions are commanding an extremely high premium.   In that line, US broker Merrill Lynch recently announced the purchase of First Republic, a California-based private bank. The deal is for $1.8 billion, over 3.4 times book value. The company will serve as part of Merrill Lynch’s banking arm, Merrill Lynch Bank + Trust.  Merrill Lynch already the #2 US wealth management company.   Founded in 1985, First Republic has 43 offices, mostly in California. It specializes in mortgages on high-end houses.   Other recent similar purchases include Bank of America’s 2006 purchase of US Trust private bank form Charles Schwab, for $3.3 billion.    As a Wall Street Journal article (“Bank of America Targets Ultrarich In U.S. Trust Deal”, 11/20/06) pointed out, the purchase would “create a new leader in the increasingly lucrative business of managing rich people's money — a business long dominated by rivals J.P. Morgan Chase & Co. and Citigroup Inc.”   That sector is judged by the minimum stake for getting accepted for the bank’s services, a minimum of $10 million in assets, while Morgan clients have around $25 million, according to the article. What has been happening is that these elite, high-service companies have become prime targets for large, multinational commercial banks.   Other similar deals in 2006 were Deutsche Banks’s acquisition of UK-based Tinley Group. Swiss bank UBS acquired the Private Client Services division of US-based Piper Jaffray. US bank Lehman Brothers bought the US-based H.A, Schupf & Co.   Banks are in lots of business, from mortgages to commercial lending, from retail banking to investment banking, from credit cards to wealth management. Increasingly, the largest banks are finding the right combination of such segments to shine in, and they are gobbling up smaller companies and redistributing assets to build a better position.     7:26:23 PM

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