Merrill's pounds 526m SNC bid creates world's largest equities trader

US investment giant Merrill Lynch last night bought London stockbroker Smith New Court in an agreed deal worth pounds 526.3m. Merrill, already the largest stockbroker in America, claimed the deal created the world's largest equities trader.

The agreement shut out any rival offer from the German bank Commerzbank, which was thought to be a serious rival, but withdrew from the talks on Thursday.

An offer by Commerzbank was the preferred choice of the less senior Smiths staff because they considered their jobs to be safer. In a statement yesterday, Merrill guaranteed them merely the legal minimum comfort but said it did not see any large-scale job cuts.

Vital to the Merrill deal was the decision by bankers NM Rothschild to side with Merrill after the price was raised during negotiations. The bank will now get pounds 136m for its 27.4 per cent stake in Smiths.

Smiths, a risk-taking securities trader with 20 per cent of London's market-making business, is the fifth British investment house to fall to foreign ownership this year.

Merrill said it was offering 560p per ordinary share which represents 2.4 times Smith's book value. Merrill admitted at press conferences held simultaneously in London and New York that it was a "full price". A counter offer is now thought unlikely.

Sir Evelyn de Rothschild's family merchant bank has made a profit of pounds 132m on the deal, having bought the stake in Smith ten years ago for pounds 4m.

Sir Evelyn had been angered when Smiths did not consult him over their initial talks with Merrill, which they revealed last week. He only gave his consent to the Merrill bid yesterday morning.

Commerzbank, the German bank, dropped out of rival bid talks with Smiths on Thursday. A spokesman said yesterday: "We came to the conclusion that the majority of senior SNC people felt more comfortable doing a deal with Merrill Lynch." Michael Marks, chairman, told his staff at a hastily called meeting yesterday afternoon: "We are now the biggest and best broking operation in the world."

Daniel Tully, Merrill's chairman and chief executive officer, said in New York: "The combination will create the largest equity securities organisation in the world - with leadership positions in origination, market-making, distribution and research."

Another Merrill's spokesman said the two firms' operations were "amazingly complimentary and there would be very few redundancies".

Merrill said it had received irrevocable undertakings to accept the offer in respect of 33.1 per cent of Smiths' shares. Smith shares surged 29p to 546p.

Smiths' 38-strong board could receive well over pounds 30m if they cash in their shares and share options for the 560p bid price. Michael Marks stands to make roughly pounds 3m from his fully paid shares, although he has no options. According to Smith's last annual report, Michael Dritz, the director who is in charge of the American operations, stands to benefit the most, with the prospect of making nearly pounds 5m from both shares and share-options.

Mr Tully said that Merrill had first identified Smith more than a year ago as a suitable partner, but formal negot iations were started more recently.

"As soon as we began talking to them, there was an immediate bond of trust. We found we shared common values and a common philosophy for conducting business," he said.

One clear stumbling block during the negotiations was the stance taken by Sir Evelyn de Rothschild. Mr Marks, Smith's chairman, admitted yesterday that there had been "some emotional ups and downs" during the talks, but added: "It was a real pleasure working with the Merrill Lynch team."

Sir Evelyn has not been able to extract any formal link-up with Merrill, which analysts feel could leave NM Rothschild exposed. But Herbert Allison, head of combined corporate and institutional business at Merrill, said: "We will assist NM Rothschild in any way we can. We have yet to get down to the detail but we are excited about the prospects of broadening our relationships."

David Komansky, Merrill's president and chief executive officer added that the firms had co-lead many equity offerings and Merrills were looking forward to expanding that in future.

Jerome Kenney, a Merrill director, said the price being paid, 2.4 times book value, was justified on forecast of expected growth. There would cash programmes and share options to incentivise Smiths staff.

"We will encourage them to stay with us. We are not looking for a high degree of turnover," he said.

Mr Marks denied he had used Commerzbank simply as a stalking horse in the bid talks.

Merrill Lynch

Employees: 43,800

Chairman: Daniel P. Tully

Chief Operating Officer:

David H. Komansky

Turnover: $18.2bn

Profits: $1.01bn

Assets under management:

$164bn

Total stockholders' equity:

$5bn

Operations: Corporate finance,

Fund management,

Equity markets

Private clients

Investment banking

Bonds.

Recent embarrassments:

Orange County

Derivatives

Recent success:

Ranked first in

Institutional Investor

poll for bond

research

Nickname:

The Thundering Herd