Merrill to Buy Britain’s Top Fund Firm for $5.3 Billion

Merrill Lynch & Co. will buy Britain’s largest fund management company for $5.3 billion, in a move that would bring a wealth of European and Japanese institutional clients to Merrill’s growing international money management business.

The deal made Wednesday with Mercury Asset Management Group would create one of the world’s largest money managers, overseeing about $450 billion in client assets. The combination would give Merrill, already the world’s largest securities brokerage, another big asset outside its home market, and would give Mercury a powerful partner with substantial experience dealing with small clients.

“Merrill has been trying to become a global player not only in securities, but also in asset management. This establishes them,” said Guru Baliga, who helps manage $6.5 billion in assets for American Express Financial Advisors, which owned about 1.6 million Merrill shares in July.

The planned acquisition is the latest in a series of consolidations taking place in the securities industry as competition forces firms to expand and seek new sources of revenue. The deal would put Merrill behind Fidelity Investments, with about $600 billion, and Barclays’ asset management unit, with $475 billion, in the ranks of global money managers.

Merrill Lynch, like many of its competitors, has been moving to expand in the highly profitable asset management business and to capture a bigger chunk of the vast market in providing financial assistance to investors abroad.

“This acquisition represents a quantum leap toward our goal of becoming a global leader in the asset management business, one of the most attractive segments of the financial services industry,” Chairman David H. Komansky said.

The deal highlights the significance of international growth as well as of asset management, a much steadier source of revenue than traditional investment banking. Many U.S. firms are looking abroad because markets in other countries are less mature than those in the United States.

“The growth rate can’t continue forever in the U.S.,” said Gregory T. Siegel, an analyst with Fitch Investors Service. “It is forcing firms to those markets where they can obtain higher growth rates going forward.”

Mercury’s core strengths in managing international and pension fund assets complement Merrill Lynch’s existing capabilities in the U.S. mutual fund and defined-contribution plan markets. Merrill also would be able to cross-sell Mercury’s international funds to its U.S. clients.

Analysts said acquiring Mercury, whose customer base consists largely of institutional clients, including 900 British pension funds, would position Merrill to take advantage of an expected boom in pension investments in Europe. The firm also manages 25 of the largest 50 Japanese corporate pension funds.

“Underlying changes that are going on in Europe in terms of retirement funding make it highly likely there is going to be a significant privatization of pension plans in the next five to 10 years. This positions Merrill to take advantage of those opportunities,” said Don McNees, an analyst with Towers Perrin in New York.

Under the deal, Merrill would pay $28.57 per share for Mercury--or 32% more than Mercury’s closing price Tuesday. The companies hope to close the deal in January.

Carol Galley, vice chair of Mercury, and Stephen Zimmerman, its deputy chairman, will serve as co-heads of the combined Merrill Lynch-Mercury business, to be headquartered in London, and will become members of the Merrill Lynch executive management committee.

Merrill shares closed at $67.25, up $1.06, on the New York Stock Exchange.