Merrill to buy First Republic

Jan 29, 2007 @ 12:16 pm

By Aaron Elstein

Merrill Lynch & Co. is paying a steep price to break into branch banking, agreeing Monday to shell out $1.8 billion — a 44% premium over market price — to acquire First Republic Bank of San Francisco, according to sister publication Crain’s New York Business.

First Republic specializes in serving rich people, the very sort of clients that Merrill and most everyone else in financial services is trying to get more of. The bank operates 43 branches; most are in California but First Republic also has locations in New York, Boston and Greenwich, Conn.

"The price being paid is quite high," wrote Punk Ziegel & Co. analyst Dick Bove in a note to clients. He questioned Merrill's move into branch banking, a business "that seems to be on the edge of a decline."

Merrill executives, of course, see things differently.

"We look forward to supporting First Republic's further expansion with additional capital and a greater range of investment products, advice and services," said Robert McCann, president of Merrill's global private client business, in a statement.

By any measure, Merrill is paying quite a bit for First Republic. The sale price, which will be paid in 50% cash and 50% stock, amounts to 24 times First Republic's estimated 2007 earnings and 3.4 times its book value.

Under Chief Executive Stan O'Neal, Merrill has been on a shopping spree. Earlier this month, it completed a $1.3 billion acquisition of First Franklin, a San Jose, Calif.-based subprime mortgage company that Mr. Bove describes as "very troubled."

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