Moody’s: Merlin acquisition is risky business
09 May 2012 New York
Image: Shutterstock
Credit ratings agency Moody’s Investor Service has reacted negatively to the Wells Fargo Securities acquisition of Merlin Securities LLC, a prime brokerage and technology provider based in San Francisco and New York.
In a note that was sent to clients earlier this week, Moody’s analyst Sean Jones called the acquisition of the prime brokerage firm, which serves more than 500 single- and multi-primed managers, “credit negative” because it shows that Wells Fargo Securities “intends to expand its capital market operations”.
Wells Fargo agreed to buy Merlin for an undisclosed sum in late April.
The prime brokerage firm has a suite of integrated solutions consisting of its MerlinPrime and MerlinSHARP products, and it provides open architecture technology, custody and clearing services, operational support and securities trading to clients in the asset management industry.
Merlin’s team will join Wells Fargo, and its managing partners, Stephan Vermut and Aaron Vermut, will continue to lead its prime services offering
Announcing the deal, John Shrewsberry, head of Wells Fargo Securities, said that the acquisition of Merlin is a “logical extension of our offering to the investment industry”, adding that it is “increasingly focused on tools to enhance risk management and improve capital efficiency”.
He said: “This transaction enhances our ability to meet customer needs and generate earnings for our shareholders, all while adhering to our disciplines of prudent risk management and controlled growth.”
It is the fact that Wells Fargo is expanding into prime brokerage that is the problem for Moody’s. Jones said that although Merlin is “small and has a limited balance sheet, we expect that Wells Fargo will build this business and seek to expand its products and services.”
He added: “Prime brokerage is typically a balance-sheet and operations-intensive business, which requires robust collateral management capabilities. We do not believe that this is a traditional area of expertise for Wells Fargo’s management.”
Wells Fargo’s traditional area of expertise, according to Moody’s, is in the consumer and commercial banking sector as a mortgage provider, which “contributes the great majority of the bank’s earnings”.
Prime brokerage requires “different risk monitoring, management and governance skills than are the traditional expertise of this company”, said Jones.
In a statement, Wells Fargo said it disagreed with Moody’s assessment. It said: “This is a modest acquisition and a measured approach to entering the prime services market. It is a natural extension of the capital markets solutions we currently provide to our corporate and institutional customers and does not represent a material change to the risk profile for Wells Fargo Securities or Wells Fargo & Company.”
Ratings agency Fitch Ratings does not think that the deal is that risky, according to its own assessment of the Merlin acquisition.
It said: “Wells Fargo is adding prime brokerage services under an open architecture framework to its suite of customer offerings. While Wells Fargo may use Merlin as a platform for further expansion, the transaction is still viewed as relatively small in nature.
Wells Fargo said it had “successfully grown” its investment banking and capital markets business through “thoughtful and measured” expansion, adding that this is based on “serving our customers’ needs and by continuing our longstanding record of prudent risk management.”
The acquisition of Merlin, which is subject to regulatory approval, is expected to conclude during the third quarter of 2012.
In a note that was sent to clients earlier this week, Moody’s analyst Sean Jones called the acquisition of the prime brokerage firm, which serves more than 500 single- and multi-primed managers, “credit negative” because it shows that Wells Fargo Securities “intends to expand its capital market operations”.
Wells Fargo agreed to buy Merlin for an undisclosed sum in late April.
The prime brokerage firm has a suite of integrated solutions consisting of its MerlinPrime and MerlinSHARP products, and it provides open architecture technology, custody and clearing services, operational support and securities trading to clients in the asset management industry.
Merlin’s team will join Wells Fargo, and its managing partners, Stephan Vermut and Aaron Vermut, will continue to lead its prime services offering
Announcing the deal, John Shrewsberry, head of Wells Fargo Securities, said that the acquisition of Merlin is a “logical extension of our offering to the investment industry”, adding that it is “increasingly focused on tools to enhance risk management and improve capital efficiency”.
He said: “This transaction enhances our ability to meet customer needs and generate earnings for our shareholders, all while adhering to our disciplines of prudent risk management and controlled growth.”
It is the fact that Wells Fargo is expanding into prime brokerage that is the problem for Moody’s. Jones said that although Merlin is “small and has a limited balance sheet, we expect that Wells Fargo will build this business and seek to expand its products and services.”
He added: “Prime brokerage is typically a balance-sheet and operations-intensive business, which requires robust collateral management capabilities. We do not believe that this is a traditional area of expertise for Wells Fargo’s management.”
Wells Fargo’s traditional area of expertise, according to Moody’s, is in the consumer and commercial banking sector as a mortgage provider, which “contributes the great majority of the bank’s earnings”.
Prime brokerage requires “different risk monitoring, management and governance skills than are the traditional expertise of this company”, said Jones.
In a statement, Wells Fargo said it disagreed with Moody’s assessment. It said: “This is a modest acquisition and a measured approach to entering the prime services market. It is a natural extension of the capital markets solutions we currently provide to our corporate and institutional customers and does not represent a material change to the risk profile for Wells Fargo Securities or Wells Fargo & Company.”
Ratings agency Fitch Ratings does not think that the deal is that risky, according to its own assessment of the Merlin acquisition.
It said: “Wells Fargo is adding prime brokerage services under an open architecture framework to its suite of customer offerings. While Wells Fargo may use Merlin as a platform for further expansion, the transaction is still viewed as relatively small in nature.
Wells Fargo said it had “successfully grown” its investment banking and capital markets business through “thoughtful and measured” expansion, adding that this is based on “serving our customers’ needs and by continuing our longstanding record of prudent risk management.”
The acquisition of Merlin, which is subject to regulatory approval, is expected to conclude during the third quarter of 2012.
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