Wells Fargo to Purchase Merlin - Analyst Blog

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On Friday, Wells Fargo Securities, the investment banking and capital markets wing of  Wells Fargo & Company ( WFC ), announced an agreement to buy San Francisco and NYC-based Merlin Securities LLC. With this move, Wells Fargo would be able to expand its capital market business.

The financial terms of the deal were not disclosed. The transaction awaits regulatory approvals and certain customary closing conditions, and is anticipated to get completed in the third quarter of 2012.

Merlin, a provider of prime brokerage services and technology in the asset management industry, offers highly developed reporting, trading, operational and capital development solutions to more than 500 hedge funds and managed account platforms. Moreover, it provides open architecture technology to clients giving them the option to choose the custodian and trading platform according to their business.

Following the closure of the deal, Wells Fargo will not only gain experienced employees, but also the established status of the strong prime brokerage business. Moreover, this will enhance Wells Fargo's capital efficiency, which will result in profits for shareholders. Additionally, the completion of the acquisition will provide new cross-selling opportunities to the customers of both companies.

Concurrently, joining hands with Wells Fargo Securities will boost Merlin's abilities and enable it to provide its clients full advantages in the changing environment. Further, Merlin's clients will get the benefit of more resources, financial services and products, which would increase the open architecture solutions that the company provides currently. Merlin and Wells Fargo Securities will continue providing services to their existing clients the way they used to, and will focus on the clients' current needs.

As per the terms of the deal, 100 of Merlin's workers will join Wells Fargo Securities. Moreover, managing partners Stephan Vermut and Aaron Vermut of Merlin will continue to direct the Prime Services Offering, even after the company's divestiture.

Merlin's deal represents Wells Fargo's second acquisition in the prime brokerage field. Earlier, in September 2011, Wells Fargo also announced its plan to acquire LaCrosse Global Fund Services from Cargill Inc. LaCrosse is an independent hedge-fund administration and middle-office service provider company of Cargill. The deal is subject to certain regulatory approvals in several jurisdictions.

With the acquisition of Merlin, Wells Fargo will join other peers such as The Goldman Sachs Group Inc. ( GS ), JPMorgan Chase & Co. ( JPM ) and Morgan Stanley ( MS ) as major prime brokerage units.

Our Viewpoint

Going forward, we believe that strategic acquisitions will help expand Wells Fargo's business and improve its profitability. Strategic acquisitions have been part of Wells Fargo's endeavor to strengthen its business model, expand capabilities and diversify.

The company has demonstrated its ability to assimilate local franchises, offering a wider range of products compared with the acquired company, thus increasing the number of options for its customers. This has been the driving force behind its growth in the recent years.

With cross-selling as its key strength, Wells Fargo has a diverse geographic and business mix that enables it to sustain consistent earnings growth. Opportunistic acquisition and the demise of some smaller players helped the company garner a larger market share. Yet, top-line headwinds and regulatory issues remain the causes of concern.

Wells Fargo currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Moreover, considering the fundamentals, we maintain a long-term Neutral recommendation on the stock.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: GS , JPM , MS , WFC

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