Hothouse - Merrill Lynch (v6).ppt

Account PreparedbySedefImer AlexGoodallandAnthonyHultonLastupdated 9 3 20 PrivateandConfidentialFordiscussionpurposesonly overviewdocument 2001ArthurAndersenAllrightsreserved 2 Purposeofdocument ThisdocumentisdesignedtoprovideadetailedoverviewofMerrillLynch including Organisationalstructure Coreactivities Marketlandscape Historicalperformance andKeystrategicissuesThisshouldbeofvaluetoanyonecomingtothefinancialservicesindustryfresh orwithsomeexperienceoffinancialservices butlimitedknowledgeofMerrillLynchitselfThedocumentalsodetailsthekeymarketdriversatplay andhowtheyareimpactingthefuturedirectionofMerrillanditscompetitors Thesedriversinclude Technology Regulation Globalisation andDemographicchange Finally thedocumentanalysestheactivitiesofMerrillLynchinthelightofthebroader networkeconomy visionanddevelopsanumberofpotentialhypothesesforthefuturedirectionofthecompany TheseshouldbeofvaluetoindividualsdevelopingproposalsforMerrillNote ThescaleofactivitiescoveredbysuchalargecompanyasMerrillLynchentailsthattherolesofthethreelinesofbusinesscanonlybedealtwithinbroadbrushstrokes Thisdocumentdoesnotprovideadetailed technicalanalysisoftheactivitiesofeachone 2001ArthurAndersenAllrightsreserved 3 Contents ExecutivesummaryMerrillLynch structureandoperationsMerrillLynch performanceKeychangedriversHypothesesAppendicesStraightThroughBusiness 2001ArthurAndersenAllrightsreserved 4 Contents ExecutivesummaryMerrillLynch structureandoperationsMerrillLynch performanceKeychangedriversHypothesesAppendicesStraightThroughBusiness 2001ArthurAndersenAllrightsreserved 5 Executivesummary MLoperations OperationsMerrillLynchandinvestmentadvisoryservices MerrillLynch ML offerstheseservicestoawidearrayofclients includingindividualinvestors smallbusinesses corporations governmentsandgovernmentalagencies MerrillLynchisorganisedintofiveregionsoutsidetheUnitedStates Europe MiddleEastandAfrica Japan AsiaPacific Australia Canada andLatinAmericaWithinthoseregions MLdividestheirbusinessintothreekeysegments CorporateandInstitutionalClientGroup CICG PrivateClientGroup PCG andMerrillLynchInvestmentManagers MLIM PerformanceMerrillLynchisanestablishedincumbent andhasseentheirnetrevenuesincreasefrom 600min1971to 26 8bnin2000 aCAGRof14 MerrillLynchemployed72 000peopleattheendof2000 2001ArthurAndersenAllrightsreserved 6 Executivesummary MLandthefinancialservicesindustry FinancialservicesindustryListedfinancialassetsofglobalsecuritiesmarketshasgrownfrom 5trillionin1980to 45trilliontoday Theyareexpectedtodoubleinearlynextcentury World widecrossborderequityinvestinghasdoubledeverythreeyearssince1980andisexpectedtoreach 5trillionby2000Thefinancialservicesindustryareaddressingthefollowingdriversofchange Reductionincoststomeetcompetitivepressures Marketinitiatives e g STPandCLS Improvedservicelevels Recognitionofoperationalrisk andE Business Inrecentyears MerrillLynchhasgrownrapidly basedonaggressiveacquisition ledstrategy strongtechnologyfocusandaboomingmarket Inparticular theacquisitionofMercuryAssetManagement nowMLIM hasbroadenedMerrill sportfolio Assuch itisconsideredwell positionedforglobalconvergenceinthefinancialservicesindustry KeyissuesGrowththroughacquisitionshaveledtoinefficienciesincorporatestructureandredundancyincoreactivities SowhilstMerrill sbreadthofcompetenceandglobalsweeppositionthecompanywell itmustfocusonaligningitsactivitiestoproduceefficienciesandraisenetmarginsMerrillLynch whichintroducedmass marketinginvesting hasbeenslowtoinvestine business ItaddedinternetinvestmentservicesonlyunderpressurefromupstartslikeCharlesSchwabandE Trade andeventhenspentmonthsrampinguptospeedMerrillLynchlagsbehindmanyoftheircompetitors suchasGoldmanSachs MorganStanley andCSFB withinitsinvestmentbankingandunderwritingactivities ItisfacingfiercecompetitionfromMorganStanleyDeanWitter andthusitsdeclineonWallStreetismakingitlooklikeapotentialtakeovercandidateMerrill soverallperformanceisslightlybelowthatoftheindustryaverage andisfacingincreasedpressureininvestmentbankingproducts e g equityunderwriting M Aadvisory andfixedincome Merrill soperatingmarginlagsbehindtheircompetitors 2001ArthurAndersenAllrightsreserved 7 Executivesummary hypotheses 2001ArthurAndersenAllrightsreserved 8 Contents ExecutivesummaryMerrillLynch structureandoperationsMerrillLynch performanceKeychangedriversHypothesesAppendicesStraightthroughbusiness 2001ArthurAndersenAllrightsreserved 9 Corporateoverview MerrillLynch Co Inc isa bulgebracket globalfinancialmanagementandadvisorycompany With68 000employeesin44countriesacrosstheworld MerrillLynchoffersabroadrangeofinvestment financing advisory insuranceandrelatedproductsandservices NetrevenuesinFY2000were 26 8bn netearningswere 3 8bn up 1 1bnfrom1999 Clientassetsarecurrentlywortharound 1 7trillion StrategicvisionMerrill sstrategicvisionistobecomethepre eminentfinancialmanagementandadvisorycompanyintheworld Thisisdefinedthroughfivebroadobjectives Clientfocus Theleaderinourchosenmarkets Thebestmanagedcompany Thebestplacetowork andThebestshareholderreturnKeyAchievements Largestglobalfootprintofanyfinancialservicesfirm with900officesin43countries Leadingglobalfirmforindividualinvestors with 1 5trillioninclientassets World sthird largestactivefundmanager withmorethan 500billioninassetsundermanagement Atoprankedglobalresearchhouseinbothequityanddebt Productsandfinancialservices Merrill sfinancialproductsandservicesofferedtotheirclientsincludethefollowing securitiesbrokerage tradingandunderwriting investmentbanking strategicservicesincludingmergerandacquisitions andothercorporatefinanceadvisoryactivities investmentmanagement origination brokerage dealerandrelatedactivitiesinswaps options forwards futures andotherderivativesandforeignexchangeproducts securitiesclearanceandsettlementservices equity debt foreignexchange commoditiesandeconomicresearch banking trustandlendingservices includingmortgagelendingandrelatedservices insurancesalesandunderwritingservices andinvestmentadvisoryservices 2001ArthurAndersenAllrightsreserved 10 Corporatestructureandservices LinesofbusinessMerrilloffersserviceswithinthreecorelinesofbusiness corporateandinstitutionalclient CICG privateclient PCG andinvestment assetmanagement MLIM CICGprovidesinvestmentbankingandstrategicadvisoryservices includingM A equityanddebtunderwriting andtradingPCGprovidesservicesprimarilytohighnetworthindividualsandmid sizedinstitutionslookingtomanagetheirfinancesactivelyTheinvestmentmanagementgroup MLIM offersawiderangeofinvestmentproductstargetedatindividualsandinstitutionsTheGlobalSecuritiesResearchandEconomicsGroupisaseparatelineofbusiness providingaservicetoCICG PCGandMLIM Activitiesbylineofbusiness 2001ArthurAndersenAllrightsreserved 11 ThePrivateClientGroup PCG Financialadvice Trustplanning Retailbrokerage Insuranceproducts Asset liabilitymanagement Retailbanking Privatebanking DescriptionPCGprovidesachoiceofwealthmanagementservicesthatassisttheirclientsgloballyinbuildingfinancialassetsandenhancingreturnsinrelationtorisktoleranceandinvestmentobjectivesPCGhasover20 200consultantsin34countries Theconsultantsworkwiththeirclientsinaddressingtheirfinancialneedsbymatchingproprietaryandthird partyproductsofferedbyMerrillLynchwithclients individualrequirementsObjectivesIncreasepretaxmarginsfrom16 to20 ReachtopthreeinvalueofonlineassetsBecometheleaderinself directedonlinebankingandinvestmentservicesInitiativesShiftfromtransactiontoasset basedpricingonclientaccountstoproduceasteadierrevenuestream CreatedaPrivateWealthservicesgroupforclientswith 30mormoreininvestableassetsJointVenturewithHSBCtocreatefirstglobalonlinebankingandinvestmentcompanyforaffluentinvestors Coreactivities ReputationMarketleaderinhighnetworthsegment with13 shareofUSmarketand3 7 globally Mostreadbrokeragefirmworldwide ThomsonFinancial 2000 Bestfirmforbrokersales Reuters Tempest2001EuropeanLargerCompanySurvey Offeringfullrangeoftrading portfoliomodellingandaccountmanagementtoolsonline throughMLOnlineandMLDirectImplementmulti channelservicemodel 2001ArthurAndersenAllrightsreserved 12 ThemarketforPCGisgrowingsignificantly PrivateclientservicesIn1999 morethan1millionpeoplejoinedthe7millionexistingindividualswithmorethan 1minliquidassets In2000 theincreasewas180 000AccordingtotheFinancialTimes MerrillLynchprimarilytargetsclientswhohave 30mininvestableassetsor 10mtoinvestAssetsinclientaccountsatMerrillLynchreached 1 5tnin2000 1995 2000CAGR 15 Non USassetsinclientaccountsgrewby23 in2000EBusinessPCGofferstheirservicesthroughtheFinancialAdvisoryCenter foradviceandexecutionservices andthroughtheirnewlylaunchedaward winningportals MerrillLynchOnLineSMandMerrillLynchDirectSMoffer Research InvestmentinfinancialproductsfromMLandotherproviders Trading Portfoliomodelling andAccountmanagement Breakdownofrevenuebyclientservice Commissions Mutualfunds securitiesinvestment portfoliomanagementTransactions newissues Bid offerrevenuesonOTCequities fixedincomeandmunicipalsecuritiesAssetmanagement Assetmanagement portfolioservices accounts ServicelineswithinPCGPrivateWealthServicesoffersfinancialsolutionstailoredtoclients uniqueneeds MerrillLynchInvestorServicesGroupoffersfinancialadvicetoclientsneedsMerrillLynchHSBCjointventureoffersonlineservicestothoseinvestorswhoprefertomanagetheirowninvestments 2001ArthurAndersenAllrightsreserved 13 Thecorporateandinstitutionalclientgrouping CICG Coreactivities Trading Dealfinancing Equityunderwriting Advisoryservices Research Securitiesunderwriting Derivativecontracts Privateplacements Loansyndication Transactionorigination DescriptionCICGraisescapitalforcorporateandinstitutionalclientsthroughsecuritiesunderwriting privateplacementsandloansyndications Italsotradessecurities currenciesandotherproducts andadvisesonMandMLXMarketEdge equitytradingplatformforretailbroker dealersinEurope Reputation Investmentbankoftheyear MergersandAcquisitionsMagazine 2000 Bestinvestmentbank BestEquity linkedHouse Euromoney 2001 2001ArthurAndersenAllrightsreserved 14 MerrillLynchlagsbehindseveral bulgebracket competitors MergersandacquisitionsInvestmentbankscanregularlygeneratefeesoftensofmillionsofUSdollarsforadvisingonM A In2000 investmentbanksadvisedonM AdealstothevalueofUS 1 8tnintheUnitedStatesalone Ironically twoofthelargestM Atransactionsin2000directlyinvolvedinvestmentbanksasacquirorsaswellasadvisors ChaseManhattan s 33bnacquisitionofJPMorgan andCitigroup s 30bnacquisitionofAssociatesFirstCapitalCorpUnderwritingUnderwritingistheprocessofraisingcapital eitherequityordebt forlargecorporateclients forexamplethroughinitialpublicofferings IPOs During2000 investmentbanksearnedUS 12 5bnforunderwritingfees Thiswasaclimbof7percentyearonyear on22percentfewerdealsInEurope localincumbentsCSFBandDeutscheBankperformedstrongly GoldmanSachs ChaseManhattan JPMorgan SalomonSmithBarney MerrillLynch Other MarketforM Aadvisory Jan Sep2000 5 000 10 000 15 000 20 000 25 000 30 000 GoldmanSachs MorganStanley CSFB MerrillLynch Citigroup LehmanBrothers DLJ JPMorgan FleetBoston DeutscheBank Top10IPOunderwriters 2000 Source ThomsonFinancial Source Livedgar MeridienResearch Note Sincetheaboveresultswerereported JPMorganhasbeenacquiredbyChaseManhattan andDLJacquiredbyCSFB MerrillLynchlagsbehindseveralcompetitorsinitsinvestmentbankinggroup sM Aandunderwritingactivities 2001ArthurAndersenAllrightsreserved 15 however tradingisthecentralcomponentofCICGandperformsstrongly InstitutionaltradingTradingisthecoreactivityofanyinvestmentbank Thecompetitioninthisareaistypicallyintense buthasbeenevenmoresosincetheslowdowninApril2000 BycontrasttoMerrill sfourthplaceperformanceinM Aandunderwriting thefirmissecondonlytoCitigroupintermsoftradingactivityAccordingtoThomsonFinancial only3institutionsrankinthetop10forM A IPO projectfinancingandtrading GoldmanSachs MorganStanley andCSFBMerrillLynchisoutofthelistforprojectfinancing butisinthetopfourfortherest Top10tradingfirmsin2000 Source InstitutionalInvestor 1Citigroup2MerrillLynch3GoldmanSachs4LehmanBrothers5MorganStanley6BearStearns7CSFB8PaineWebber9JPMorgan10UBSWarburg M AtransactionsvaluesfromJan Sep2000 Source ThomsonFinancial ProceedsfromIPOunderwritingin2000 Q12001 Source Livedgar 2001ArthurAndersenAllrightsreserved 16 MerrillLynch sassetmanagementgroup MLIM ObjectivesGrowrevenuesby14 annuallyIncreasepretaxmarginto30 Achieveabovebenchmarkperformanceformorethan60 ofassetsAchievetopquartileperformanceformorethan35 ofassetsInitiativesSpent2000developingprivateequityandhedgefundcapabilitiesIncreasedfocusoncross sellingassetmanagementproductsthroughthefirm sbroadcustomerbaseandpursuingdistributionopportunities Productdevelopment Research Trading Sales Coreactivities Reputation Topfundmanagerforresearch ConsensusResearchInternational 2001 MLIM Nothingtowritehomeabout butnomajorissueseither MorganStanleyDeanWitterReport July2001 MerrillLynchInvestmentManagersisoneoftheworld slargestassetmanagers investingoverUS 500billionforclientsinmorethan70countries MLinvestsinarangeoffinancialproducts includingactive passive quantitative hedgefundandprivateequityfundsforinstitutional mutualfundandprivateclientinvestors 2001ArthurAndersenAllrightsreserved 17 Atyearend1999 MLIMwasthetenthlargestassetmanagerglobally MarketsummaryTheassetmanagementmarketisfarmorefragmentedthaninvestmentbanking MLIMhadapproximately 550bnofassetsundermanagementattheyearend1999 Atthistime 30firmshadbetween 250and 1 000bnofassetsundermanagementMLIMisgainingmarketsharebyincreasingitsproductrangeandpushingitsproductsthroughdifferentdistributionchannelssuchasthirdpartiesandtheinternet Ithasalsobenefitedfromaboveaverageinvestmentperformance 0 200 400 600 800 1000 1200 Fidelity UBS Kampo Axa Barclays StateStreet CreditSuisse DeutscheBank CapitalGroup MerrillLynch Top10assetmanagersin1999 Source MeridienResearch 2001ArthurAndersenAllrightsreserved 18 GlobalsecuritiesresearchandEconomicsGroup Coreactivities Convertiblesresearch Investmentstrategy Highyieldstrategy Advisoryservices Fixedincomeresearch Quantitative Equityderivatives Economics marketanalysis Equityresearch DescriptionGlobalsecuritiesresearchandeconomicsgroupreportsindependentlyofthethreemainbusinesslines toensureintegrityThegrouphasmorethan900analystsprovidingequity fixedincome quantitativestrategyandeconomicresearchonaglobalbasis withmorethanhalfspecialisingoutsidetheUS ObjectivesToserviceclientswithinvestmentideas macroviewsandspecificrecommendationsDeliverleadingresearchtoinstitutionalclients individualinvestorsandfinancialconsultantsinMerrillLynch sPrivateClientnetworkInitiativesResearchisdeliveredthroughseveralchannels includingM CommentaryandrecommendationsforindividualclientsareavailableonMerrillLynchDirect MerrillLynchOnLineandMerrillLynchOnLineInternationalResearchforinstitutionalclientsareavailablefromMLXportal andthroughlinksfromBond hubandTheM Reputation Researchwasranked 1forthesixthyearinarow Institutionalinvestor AllAmericaResearchSurvey 2000 MLearned 1votefortheforthyearinarow TheWallStreetJournal 2000 Allstaranalystssurvey CICG PCG MLIM MerrillLynch GSREG 2001ArthurAndersenAllrightsreserved 19 Eachlineofbusinessissupportedbythesharedservicesofthegroupasawhole Clearing Settlement Outsourcingservices Finance Applicationdevelopment Systemsintegration Regulatorycompliance Performancereporting Riskmanagement Creditmanagement StrategyMerrillLynchhasanin housestrategygroupwhichlooksintofirmwideissuesandmarketopportunitiesBackOfficeMerrillLynchemploysAccentureforprojectsintheOperationsandTechnologygroupsTrends Movetoever shortersettlementcycles e g T 1inUSMerrillLynchisproactivelyseekingmoretechnologyjointventuresandalliancestoachieveStraightThroughBusiness STB transactionprocessingGeneralmovementtowardsoutsourcingprocessingactivitiesandretainingvalue addedservices Coreactivities CICG PCG MLIM MerrillLynch GSREG 2001ArthurAndersenAllrightsreserved 20 Contents ExecutivesummaryMerrillLynch structureandoperationsMerrillLynch performanceKeychangedriversHypothesesAppendicesStraightthroughbusiness 2001ArthurAndersenAllrightsreserved 21 Duringthenineties MerrillLynchgrewrapidlyasthemarketsitoperatedinexpanded RevenuestreamsMerrillderivesroughlyequalrevenuesfromPCG 45 andCICG 46 withMLIMcontributing10 However CICGisthelargestearningscontributor 64 ofgroupEBIT andgeneratedthehighestEBITmargin 31 Non USrevenuesharehasgrownfrom25to34percent 1996 2000 Butwith19 oftotalrevenuesfromEurope Merrillstilllagsbehinditscompetitors e g GoldmanSachshas30 ThismayimpactrevenuesfromtheyoungandrapidlygrowingEuropeanretailbrokerageandassetmanagementmarkets Source MSDW July2001 2001ArthurAndersenAllrightsreserved 22 MerrillLynch scomparativeperformance ComparativeperformanceOverall historicalgrowthisslightlylowerthantheindustryaverage RevenuesgrewataCAGRof18 between1997and2000 to 27 1bnInthesameperiod EBITgrewby41 CAGRto 6 03bn boostedbyIPOandM AfeesearnedonthebackoftheUStechnologyboom Morethan 3 495bnworthofdealswereannouncedgloballyin2000 accordingtoThomsonFinancialEuropeanmarketgrowthThecombinationofanemergentequitycultureandregionalhomogenisationhashelpedstimulateamassivegrowthinthemarketforEuropeanfinancialservicesThebigthreeUSplayers MerrillLynch MSDWandGoldmanSachs arefacingstiffcompetitionforthismarketagainstasecondtierofotherUSbanks e g JPMorganChase andregionalincumbents suchasDeutscheBank UBS andCreditSuisse Incumbentsareprimarilyexploitingbalancesheetstrengthtogainmarketshare butalsofrombuyingmarketpresenceintheUS e g CSbuyingDLJinAugust1999for 11 5bn UBS purchaseofPaineWebberfor 12 5bn Itislikelythatthesecompanieswillbreakintothetop tierinEurope whetherbygrowthoracquisition mergers Thelatterroutemayprovemorelikelyinthemorechallengingenvironmentcurrentlybeingfaced 2001ArthurAndersenAllrightsreserved 23 Alongwithmarketboom Merrill srecentgrowthwasalsoduetoanaggressiveacquisitionstrategyandtechnologyfocus AcquisitionstrategyThekeyacquisitionsforMerrillinthepastfiveyearshavebeenMercuryAssetManagementin1997 whichdevelopedthefirm sportfoliotoofferextensiveassetmanagementservices andthemarketmakerHerzogHeineGeduldlastyearThepurchaseofmarketmakersbyeachofthemajorinvestmentban