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Merrill Lynch on Monday underlined the lure of the rich for Wall Street banks by paying $1.8bn for First Republic, a California-based private bank and wealth management company.

In its biggest acquisition in 10 years, Merrill is paying a 44 per cent premium for First Republic, which will retain its name as a separate business within Merrill Lynch Bank & Trust.

The deal highlights the high prices big banks are prepared to offer to expand in the fast-growing business of serving the US’s ultra-rich. In November, Bank of America paid Charles Schwab 30 times 2006 earnings for its US Trust private banking unit and other US and overseas banks are looking to buy in the sector.

Merrill is paying 24 times forecast 2007 earnings and 3.4 times current book value.

Bob McCann, head of Merrill’s private client business, said the deal would accelerate the growth of its high net worth business.

“Our goal is to provide First Republic with the resources and support to replicate the firm’s success in key markets across the country and to benefit from its deep banking expertise.”

Founded in 1985, First Republic has 43 branches in 12 of the richest metropolitan areas in the US including New York. Merrill will retain the leadership of Jim Herbert, co-founder and chief executive, and Katherine August-deWilde, chief operating officer.

Mr McCann said that while First Republic would operate as a separate division and Merrill expected its private client business “to benefit from its outstanding history, excellent credit and lending capabilities and its experienced management team.”

First Republic, which specialises in luxury-home lending, is at the opposite end of the spectrum from Merrill’s most recent purchase – First Franklin, the sub-prime mortgage lender, for which it paid $1.3bn in September.

Stan O’Neal, chief executive, has been keen to see Merrill capture more of its private clients’ banking business and is known to have looked at potential retail bank acquisitions.

William Tanona, analyst at Goldman Sachs, said the deal made sense strategically but the key would be the retention of advisors and assets.

Mr O’Neal, is known to have looked at potential retail bank purchases but the move to go into branch banking, albeit with high net worth customers, under another brand surprised some analysts.

Richard Bove, analyst at Punk Ziegel, said the price looked high and that Merrill was able to buy it because branch banking was “peaking, just as the sub-prime mortgage sector is”.

Merrill’s shares fell 2.3 per cent to $92.39.

Copyright The Financial Times Limited 2017. All rights reserved.
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