Merrill Lynch buys First Republic

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Merrill Lynch has agreed to purchase San Francisco’s First Republic Bank (FRC) for $1.8 billion in stock and cash, a move that gives the financial giant access to First Republic’s client roster of wealthy individuals, a growth market.

The deal by Merrill Lynch & Co. Inc. (MER) gives First Republic Bank shareholders $55 a share, half in cash and half in stock. First Republic will continue to operate separately under its own name, keeping its headquarters in San Francisco, its board of directors as an advisory board, and retaining Jim Herbert as chairman and CEO and Katherine August-deWilde as president and COO. The sale is expected to close in the third quarter of 2007.

“We think this is a terrific opportunity for our clients as well as our employees,” August-deWilde said Monday, adding that “virtually all” staff will be retained. “We expect Merrill Lynch to provide our clients with a greater range of products and services. We expect to help their clients on the banking side. Their clients need loan and deposit products.”

BMO Capital Markets Senior Bank Analyst Lana Chan said the deal was clearly positive for First Republic because the sale price is significantly higher than the stock price on Friday, up 44 percent from $38.30. Merrill Lynch will also help fund First Republic’s future growth, Chan said. In 2006, First Republic expanded into up-market cities in the Northeast, California and the Pacific Northwest, and purchased the Bank of Walnut Creek with its branches in upscale East Bay cities.

Alongside banking of a wide range of industries, including wine, venture capital and nonprofits, First Republic serves as banker and luxury-home mortgage lender to many wealthy individuals, a growth industry for Merrill Lynch. The number of households with more than $1 million in investable assets grew 7 percent between 2004 and 2005, while households with $250,000 to $1 million in assets grew 29 percent, according to a BMO Capital Markets report.

“First Republic will enable Merrill Lynch toaccelerate its strategic objective of growing its high-net-worth business,” Merrill Lynch Global Private Client President Robert McCann said.

Merrill Lynch has offices for high-net-worth individuals in four cities that First Republic already serves, as well as in Atlanta, Dallas and Chicago.

It might make sense for First Republic to open offices in those cities, but that has not been discussed or decided, August-deWilde said.

Reaction to the price of the deal was mixed. Goldman Sachs analyst William Tanona found the acquisition pricey but “in line with what Bank of America agreed to pay for U.S. Trust late last year,” he said in a research note.

KBW Inc. analyst Manuel Ramirez said he found the sale surprising, and would have valued the franchise more aggressively. He speculated that Herbert’s age — in his 60s — might have influenced the decision. He said it was important that First Republic continues to be run separately.

“I think it’s a very unique business model, and I think a lot of clients are there, frankly, because it’s not a big bank,” Ramirez said.

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