Merrill Lynch ( MER), fresh off a restructuring jag in which it laid off thousands and streamlined its American operations, filed a $15 billion mixed shelf registration Friday. The company plans to use any proceeds for general purposes, which can mean anything from acquiring a rival to funding its pension plan. And while $15 billion would be enough to help Merrill buy something, analysts say it's more likely raising the money to keep its business lines competitive with rivals like J.P. Morgan Chase ( JPM) and Bank of America ( BAC). "You've got to ask yourself, Merrill -- what does Merrill need?" said Brad Hintz, who covers the stock for Bernstein. "They've got a world-class investment banking operation. They've got a strong asset management operation. They're a dominant player in retail. Not certain what needs to be added.
Company CEO E. Stan O'Neal is fixing what he's got rather than buying anything -- they're getting smaller, not larger." Analysts think Merrill will use the money to keep up with the Joneses instead of buying them out. The general trend in the financial services industry is toward broader product lines that meet a wide variety of consumer needs. And in a recent conference call touting its performance, rival J.P. Morgan told investors that the future lay in precisely this kind of integration. "Integrated is important because it is quite clear in the marketplace that clients want integrated solutions," said Marc Shapiro, J.P. Morgan's vice chairman of finance and risk management. "It is not an accident that over any recent period of time, those companies -- those financial services companies that offer integrated solutions -- are gaining market share relative to narrower competitors." And indeed, back when it announced earnings, J.P. Morgan trumpeted the fact that its merger with Chase had finally paid off, showing some of its long-rumored growth potential. The brokerage announced a 12% year-over year revenue increase for the quarter, with big gains coming from net interest income, fees from bond and Treasury trading, securities gains and retail loans.
"Well, I think in general, if you listen to that conference call, J.P. Morgan Chase is arguing that in order to function in the capital markets in the future, you'll need excellence in lots of disciplines," said Richard Bove, an analyst Hoefer & Arnett. "J.P. Morgan is claiming it has the edge." But multidiscipline excellence isn't cheap, especially at a time when Merrill Lynch is paring its operations. Today the firm employs 1,300 fewer employees than it did five months ago, which helped lower the amount it spends on compensation and benefits by 6% year over year in the first quarter of 2003. Merrill last filed for a shelf registration in August 2002, when the company planned to raise $10 billion. But in order to do more with less and keep providing a wide array of financial products, many of which need to be backed up with long-term debt on its balance sheet, another one was necessary. "Merrill is very much undercapitalized -- not relative to its current needs -- but relative to Solly, J.P. Morgan, Bank of America in what is this new evolution of the capital markets business," said Bove. "Plus, Merrill has shown interest in going beyond banking and believe they have a real opportunity by being a consumer lender and depository. But it needs capital to pursue that vision and bring itself up equal to the people it wants to compete with." On Friday, shares of Merrill rose 0.5% to $42.08 on the news.