‘Merchant Banking’ : Rose by Other Name May Not Smell as Sweet

How the genteel-sounding term merchant banking came to describe what even Wall Street acknowledges as the riskiest business to hit America’s investment community in years is not known for sure. The business is so competitive that every player seems to insist on taking credit both for coining the term and for being the first to enter the business.

Their insistence is comic.

“First let’s separate the ------ from the fact; what people are hooplahing today actually started in 1985--and Merrill Lynch was the first, with a deal for Comsat,” Merrill Senior Vice President Barry S. Friedberg insisted.

Not so, said First Boston Managing Director William Mayer. First Boston was doing small deals of the type now called merchant banking as far back as 1979, he said. And it was First Boston’s $865-million bridge loan to Campeau for the Allied Stores takeover last year that is often credited with elevating merchant banking from fad to revolution in the making.

But Shearson Lehman Bros. also begs to differ. Vice Chairman Peter Solomon fondly recalls what he considers the precise moment of merchant banking’s birth. It was a Thursday afternoon in January, 1985, he said, when a junior member of the investment firm persuaded his superiors to lend $18 million so that a small Chicago broadcasting company could clinch a deal.

The ‘Neiman-Marcus’ Approach

Solomon also has what may be the best explanation for how the term merchant banking came to be a euphemism for risking one’s own capital. “I come from a family of merchandisers, and in that business you need to have the classiest name,” he said. “They call it the Neiman-Marcus approach,” after the high-fashion retailer recently spun off by California’s Carter Hawley Hale.

“We had decided that we were going to stake our reputation on building the best merchant banking business around, so we needed the classiest name we could find,” he said. “What is classier than ‘merchant banking’?”