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.
GOLDMAN SACHS (
GS
): Free Stock Analysis Report
JPMORGAN CHASE (
JPM
): Free Stock Analysis Report
MORGAN STANLEY (
MS
): Free Stock Analysis Report
WELLS FARGO-NEW (
WFC
): Free Stock Analysis Report
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