Credit rating agency Moody's Investors Service, a division of
) has raised concerns about
Wells Fargo & Company
) following its recent announcement to buy San Francisco and New
York-based Merlin Securities LLC, according to a report in the New
York Times. As per the rating agency, the deal is considered as a
credit negative for Wells Fargo.
Merlin is a provider of prime brokerage services and technology
in the asset management industry. On the other hand, Wells Fargo
has expertise in consumer and commercial lending and mortgage
business. The company has performed comparatively better due to
lesser exposure to the capital market businesses, which are
susceptible to market volatility.
However, its foray into prime brokerage signals the company's
intention to expand its capital market business and
investment-banking activities in particular. This would in turn add
to its risk profile.
Notably, prime brokerage refers to a range of services offered
by investment banks and securities firms to hedge funds and other
professional investors. Services provided under prime brokering are
securities lending, leveraged trade executions and cash management,
among other things.
In the last week of April, Wells Fargo Securities, the
investment banking and capital markets wing of Wells Fargo,
announced an agreement to buy Merlin Securities LLC to expand its
capital market business. The financial terms of the deal were not
disclosed. The transaction, pending regulatory approvals and
certain customary closing conditions, is expected to be over by the
third quarter of 2012.
Following the deal closure, Wells Fargo will not only gain
experienced employees, but also the established status of a strong
prime brokerage. Additionally, the completion of the acquisition
will provide new cross-selling opportunities to the customers of
both companies. This deal provides opportunity for Wells Fargo to
diversify its revenue stream and aid in boosting its top line.
In fact, the Merlin's deal represents Wells Fargo's second
acquisition in the prime brokerage field. Earlier, in September
2011, Wells Fargo 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.
The acquisition of Merlin will result in Wells Fargo stepping
into the shoes of
The Goldman Sachs Group Inc.
JPMorgan Chase & Co.
), which are already major prime brokerage units.
Though this Merlin deal reflects Wells Fargo's focus on
developing its capital market business subject to market
volatility, we believe that the company's measured approach, risk
monitoring efforts and a better management would help in growing
the business and add to its expertise.
As a matter of fact, strategic acquisitions have been part of
Wells Fargo's endeavor to strengthen its business model, expand
capabilities and diversify. 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
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