Stock Broker History Merrill Lynch

Merrill Lynch & Co., Inc. is the largest retail brokerage house in the United States, the leading U.S. investment banker, and a global leader in debt and equity underwriting. Long committed to the needs of the small investor, Merrill continually diversified its offerings from the late 1960s through the 1990s. Now a global giant in the industry, increasingly active in a variety of investment fields outside the retail business, Merrill has evolved far from its original concentration on what its founder called "people's capitalism."

One of the Merrill Lynch's predecessors was the partnership of Burrill & Housman, founded in 1885. In 1890 William Burrill left the firm he had created, and the next year Arthur Housman's brother Clarence joined what was then A. A. Housman & Company. When Arthur Housman died in 1907, he left behind one of Wall Street's leading brokerage houses. This firm in due course became E. A. Pierce & Company.

That same year, Charles Merrill and Edmund Lynch arrived in New York, where they met and became friends. The two 22-year-old entrepreneurs had both recently finished college and gravitated to Wall Street to seek their fortune. At that time, the stock market was chiefly the domain of a small number of eastern businessmen, but Merrill quickly realized the vast potential of financial markets funded by a broad spectrum of middle-class Americans. He received his initial training in the bond department of Burr & Company, and then set up his own firm in 1914. The following year he persuaded Edmund Lynch to join him, and Merrill, Lynch & Company was born.

The company prospered and grew quickly, earning a strong reputation in financial circles for financing the newly emerging chain store industry. Merrill himself was a founder of Safeway Stores, and the company underwrote the initial public offering for McCrory Stores. By the late 1920s, Merrill, Lynch was reaping the benefits of that decade's prolonged economic boom, but Charles Merrill gradually became uneasy about the frantic pace of investment. He predicted that bad times were ahead as early as 1928, warning his clients and his own firm to get ready for an economic downturn. When the crash came in 1929, Merrill, Lynch had already streamlined its operations and invested in low-risk concerns. Despite this foresight, in 1930 Merrill and Lynch decided to sell the firm's retail business to E. A. Pierce & Company and concentrate on investment banking.

E. A. Pierce & Company was the direct descendent of A. A. Housman & Company. The company was named for Edward Allen Pierce, who had joined Housman in 1901, become a partner in 1915, and the managing partner in 1921. After World War I, Pierce concentrated on building the firm into a nationwide network of branches connected by telegraph, in order to reach more customers. After a 1926 merger with Gwathmey & Company, the firm was renamed E. A. Pierce & Company the following year.

Like most brokers, Pierce struggled through the depression years, and in 1939 he persuaded Charles Merrill to rejoin him in the retail business. In 1940 Merrill Lynch, E. A. Pierce & Cassatt opened its doors, dropping the comma between Merrill and Lynch for the first time and adding Cassatt, a Philadelphia firm that had sold part of its business to Pierce and part to Merrill, Lynch in 1935.

The new firm was devoted to the radical concept of offering to its investors a "department store of finance." Clients were urged to research their financial options, and Merrill Lynch saw itself as a partner in that process, even providing educational materials. In 1941 the firm merged again; this time it became Merrill Lynch, Pierce, Fenner & Beane when it absorbed Fenner & Beane, a New Orleans company that was the nation's largest commodities house and the second-largest "wire house" (an investment firm that, like E. A. Pierce, depended on its private telegraph wires for a broad-based business).

During World War II the company benefited greatly from the economic turnaround brought by increasing military spending. Throughout the bull market of the postwar period and the 1950s, Merrill Lynch continued to be an innovator and a popularizer of financial information. The firm erected a permanent Investment Information Center in Grand Central Station, distributed educational brochures, ran ads with titles like "What Everybody Ought to Know About This Stock and Bond Business," and even sponsored investment seminars for women. These new ideas made Merrill Lynch the best-known investment firm of the day. Charles Merrill's reputation soared to such heights that shortly before his death in 1956 one Wall Street historian referred to him as "the first authentically great man produced by the financial markets in 50 years."

In 1958 the firm juggled names again. Alpheus Beane, Jr., dropped out of the firm, and since Winthrop Smith had taken over as directing partner two years earlier, the firm was renamed Merrill Lynch, Pierce, Fenner & Smith (ML). The next year it became the first large Wall Street firm to incorporate, and earnings reached a record high of $13 million.

During the 1960s the company began to diversify and expand internationally. In 1964 Merrill Lynch entered the government-securities business when it acquired C. J. Devine, the nation's largest and most prestigious specialist in that market. Over the course of the decade the firm also entered the fields of real estate financing, asset management, and economic consulting, and added 20 new overseas offices. The company paid special attention to establishing a European presence, which allowed participation in the developing Eurobond market, and by 1964 had succeeded in becoming the first U.S. securities firm in Japan. In that same year ML was named lead underwriter for the $100 million public offering of Comsat, builder of the world's first telecommunications satellite, thus solidifying its position as one of the country's major investment-banking firms. The company underwrote the sale of Howard Hughes's TWA stock in 1965, and in the next ten years added significant new business with firms such as Commonwealth Edison, Fruehauf, and Arco. By the end of the decade Merrill was managing about $2 billion annually in such offerings.

One of these projects, a 1966 debenture issue for Douglas Aircraft, led to an investigation by the Securities and Exchange Commission (SEC) and a substantial rewriting of the regulations governing full-service investment firms like ML. The SEC charged that Merrill had passed on to some of its institutional clients confidential information about Douglas gathered while serving as the latter's investment banker. The company neither admitted nor denied the allegations but did agree to pay some fines, and the SEC took the opportunity to tighten its rules regarding insider trading and the prevention of unwarranted intraoffice disclosures.

Net income in 1967 was a handsome $55 million, representing an increase of 300 percent during the previous eight years. In the following year, Donald T. Regan was named president of Merrill Lynch, and two years later he became chairman and CEO. Regan guided ML in an ambitious program of diversification aimed at making the company a "one-stop investment and estate-planning institution." This included ML's first determined entry into the real estate field with the 1968 acquisition of Hubbard, Westervelt & Motteley, enabling it to offer to customers a range of mortgages, leasebacks, and other options; a major move into the mutual fund markets; and the purchase of Royal Securities Corporation of Canada, significantly strengthening ML's position in that country.

The firm also absorbed the New York Stock Exchange's fifth-largest brokerage house, Goodbody & Company, in 1970 when that company fell victim to Wall Street's so-called "paper crunch disaster." Overextended trading houses were generating more transaction records than their accounting departments could keep up with, resulting, in the case of Goodbody and many others, in massive confusion and eventual collapse. The exchange asked ML to step in and help Goodbody, and ML ended up acquiring the firm at the end of 1970. The bailout cost little and brought ML new expertise in the area of unit trusts and options trading.

In 1971 Merrill Lynch became the second member of the New York Stock Exchange to invite public ownership of its shares, and in July of that year became the first to have its own shares traded there. Shortly thereafter, the company adopted its most recent change of name, forming a holding company called Merrill Lynch & Co., Inc., with Merrill Lynch, Pierce, Fenner & Smith as its principal subsidiary.

Regan's diversification program continued with a 1972 move into international banking. London-based Brown-Shipley Ltd. soon became Merrill Lynch International Bank, and in 1974 ML acquired the Family Life Insurance Company of Seattle, Washington. In 1976 ML formulated a strategy to meet the challenge of the increasingly complex international financial marketplace by offering "a diversified array of securities, insurance, banking, tax, money management, financing, and financial counseling." Formerly clear demarcations between the various money professions were rapidly blurring, as ML demonstrated in 1977 when it announced the creation of the Cash Management Account (CMA). This unique account allowed individual investors to write checks and make Visa charges against their money market funds. Banks did not appreciate this incursion into their territory and mounted a number of legal campaigns to stop it, to no avail. By 1989, fully half of ML's $304 billion in customer accounts were placed in CMAs, and most of the other leading brokerage houses had developed similar integrated-investment vehicles.

Despite its sustained attempt to achieve a steady level of profit through diversification, ML's earnings have reflected the volatile nature of its core securities business. For example, 1971 profit reached a new high of $70 million, but was followed by the difficult oil-embargo years of 1972--74; and while 1975's record $100 million was not equaled for several years afterward, 1980 saw record highs of $218 million in profit and $3 billion in revenues. That year also marked the end of the Regan era at ML, as new U.S. President Ronald Reagan named Donald T. Regan secretary of the treasury and later made him White House chief of staff.

Roger Birk became the company's new chairman and CEO, followed in 1984 by William A. Schreyer. Schreyer, unhappy with ML's failure to match the earnings of some of its more flamboyant competitors, made increased profitability his chief goal. To that end, Schreyer reorganized the vast company, strengthened its trading, underwriting, and merger and acquisition departments, and made a $1 billion move into new offices in the World Financial Center. The firm also cut spiraling operating costs and trimmed 2,500 employees from its ranks.

In 1985 ML met a longstanding goal when it became one of the first six foreign companies to join the Tokyo Stock Exchange. The following year, when the firm became a member of the London Exchange, ML was able to offer round-the-clock trading. Later in 1986 ML sold its real estate brokerage unit as part of Schreyer's plan to unload low-profit concerns so that the company could focus more on using its powerful retail divisions to sell the securities its investment-banking department brought in. The strategy worked; profits increased to a record $453 million during that year.

Also in 1986, scandal hit when Leslie Roberts, a 23-year-old Merrill Lynch broker, was arrested by the FBI for mail fraud. Roberts's complex fraud scheme lost huge sums&mdash much as $10 million from a single investor's account. The Roberts case typified for many the money fever of pre-crash Wall Street, and the incident attracted international attention.

Then in April 1987, the company was caught speculating in hugely unsuccessful fashion when it lost $377 million trading mortgage-backed securities--the largest one-day, one-company trading loss in Wall Street history. Coupled with the crash of October 1987, profits were sent reeling and ML was forced to freeze salaries, cut bonuses, dismiss employees, and slash commission payouts to its sales force. But profits increased dramatically the next year, reaching a record high of $463 million. During 1988 ML also achieved a long-held goal when it edged out Salomon Brothers to become the largest underwriter in America. The following year ML realized another long-term goal: the firm became the world leader in debt and equity securities, this time besting First Boston Corporation in the race for the top spot. Merrill Lynch remained in the thick of the hot merger-and-acquisition business as well, earning, for example, a tidy $90 million for helping put together the $25 billion leveraged buyout of RJR Nabisco Inc. that year.

Although Merrill Lynch's revenue and assets under management grew steadily from 1988 to 1990, its return on equity continued to lag behind other firms in the industry. Observers in particular cited the company's traditional inability to control costs&mdashcording to Business Week, it was "powerful but awkward and overweight ... hobbled by a costly, bloated bureaucracy." Schreyer embarked on an ambitious reorganization which created 18 operating divisions, the managers of which were accountable for all costs therein. ML also downsized, reducing its head count from 48,000 in 1989 to 37,000 in 1991 and eliminating unprofitable subsidiaries such as Merrill Lynch Realty, Inc. and its clearing service Broadcort Capital Corp. It made additional cuts in its non-U.S. operations. Schreyer's overall cost-containment program paid off by reducing costs $400 million dollars from 1989 to 1991.

Perhaps most importantly, however, Schreyer changed the mind-set of the company from an obsession with generating revenue to a focus on earning profits. Compensation programs tied to the production of revenue were scrapped to make room for new schemes based on return on equity (ROE). Schreyer set an overall company goal of 15 percent ROE, but also held ML divisions to this standard as well. As a result, Merrill Lynch's ROE figures improved dramatically in the early 1990s--5.8 percent in 1990, 20.8 percent in 1991, 22 percent in 1992, and 27.3 percent in 1993. This achievement did not, however, come at the expense of growth. From 1990 to 1993, gross revenues increased from $11.15 billion to $16.59 billion, while assets under management increased from $110 billion to $161 billion. In the midst of this success, Schreyer retired in 1993 and was replaced as chairman and CEO by Daniel P. Tully, who had been president and COO.

By 1994 ML had perhaps achieved a long-held goal of diversification to such a degree that it could achieve an average ROE of 15 percent across business cycles. Other firms in the industry struggled in 1994 as a series of U.S. Federal Reserve interest rate hikes battered the bond market and reduced underwriting dramatically. Merrill Lynch--though its profits were down significantly in the second, third, and fourth quarters--still managed a ROE of 18.6 percent for the year on record gross revenues of $18.23 billion. Since the company had the ability to offer its customers a full range of financial services and investment opportunities, it could generate revenues--and profits--in all types of market environments. ML's continuing growth in the global market--highlighted in 1994 by its first-time leadership in Eurobond and global bond underwriting--also promised to help the firm overcome downturns in the economies of individual countries or regions.

1994 did leave a cloud hanging over the otherwise sunny forecast for Merrill Lynch's future. Orange County, California, was forced to file for bankruptcy late in 1994 after losing nearly $2 billion in a $7.6 billion county investment fund. Throughout the 1990s, the Orange County treasurer had leveraged the fund in order to purchase securities that would increase sharply if interest rates fell. The scheme worked very well until the 1994 Federal Reserve rate hikes sent the fund's securities into a tailspin. The county subsequently sued ML for $2 billion, claiming that the firm had advised the treasurer to make investments that exceeded state-mandated limits on risk. Merrill Lynch denied that it had done anything wrong, and claimed that it had not been the treasurer's financial adviser.

In mid-1995 Merrill Lynch became the largest investment bank in the world in terms of equity sales, trading, and research through its acquisition of England's biggest independent securities firm, Smith New Court PLC. With the $842 million purchase, ML not only increased its presence in England but also gained businesses in several countries where it had none, such as South Africa, Malaysia, and Thailand. The acquisition thus brough further geographic diversification to Merrill Lynch's operations.

In the difficult environment of the mid-1990s financial services industry, Merrill Lynch was at the top and nearing its goal of "being the world's preeminent financial management and advisory company." If observers' predictions of an impending shakeout in the industry were to come to pass, the company was well positioned to take advantage of the fallout and strengthen its hold on various segments of the industry.

Further Reading:

"American Municipalities: Merrill Lynched," Economist, December 17, 1994, pp. 76--78.
Byrnes, Nanette, and Leah Nathans Spiro, "Will Merrill Take a Hit in Orange County?," Business Week, February 13, 1995, p. 86.
"The Culprits of Orange County," Fortune, March 20, 1995, pp. 58--59.
Friedman, Jon, "The Remaking of Merrill Lynch," Business Week, July 17, 1989, pp. 122--25.
Hecht, Henry, ed., A Legacy of Leadership: Merrill Lynch 1885--1985, New York: Merrill Lynch, 1985, 151 p.
LaPlante, Alice, "Merrill's Wired Stampede," Forbes, June 6, 1994, pp. 76--80.
Lenzer, Robert, "Merrill at the Half-Trillion Mark," Forbes, April 26, 1993, pp. 42--43.
Michels, Antony J., "Get Lean When the Times Are Fat," Fortune, May 17, 1993, pp. 97--100.
Regan, Donald T., The Merrill Lynch Story, New York: Newcomen Society in North America, 1981, 22 p.
Savitz, Eric J., "Bull in a China Shop?: Merrill Lynch May Be Getting a Bum Rap from Investors," Barron's, September 17, 1990, pp. 10--11, 20.
Spiro, Leah Nathans, "Raging Bull: The Trimmer New Look of Merrill Lynch," Business Week, November 25, 1991, pp. 218--21.
International Directory of Company Histories, Vol. 13. St. James Press, 1996.
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