At a time when the securities business again is being buffeted by declining markets, a squeeze on scarce capital and the prospect of further consolidations, Merrill Lynch, the industry leader, continues to position itself as a broadly diversified financial services company that it hopes will be less vulnerable to the stock market's whipsaw cycles.
According to Merrill Lynch Co. Chairman Donald Regan, the idea is to supply Merrill Lynch's enviably large customer base of individuals, institutions, corporations and governments with as many different financial services as possible.
Most recently, the company's diversification effort has keyed in on the massive market for real estate, which over the last decade has by and large proved to be a much smarter place for investors to put their money than either stocks or bonds.
Merrill Lynch Co., the holding company for the well-known brokerage firm, is in the process of acquiring AMIC Corp., which insures home mortgage lenders from defaults. The price tag is $88 million. The company already owns Family Life Insurance, which specializes in mortgage protection for homeowners.
Last month, the company also agreed to terms for purchasing two mortgage banking subsidiaries of Huntoon Paige & Co. for $15 million.
Merrill Lynch already owns an executive relocation company that has an inventory of 3,500 homes around the country with an average market value of $75,000 each.
It also has a subsidiary, Merrill Lynch Hubbard, which puts together real estate tax shelter packages for investors.
And it is conducting talks with a large number of real estate brokerage firms around the country with the idea of acquiring at least 10 in order to combine them eventually into the nucleus of a national chain.
"According to a study we made before we dicided to get into this heavily . . . real estate commissions 10 years ago represented half of securities brokerage commissions generated by member firm of the New York stock exchange," said Regan. "Today it's three times as much, and it's running at a rate of about $8.5 million a year."
"It's a huge market, but it's never been a national market," he noted.
The diversification drive has not blunted the expansion of the holding company's brokerage subsidiary, Merrill Lynch, Pierce, Fenner & Smith, which expects to have more than 310 offices by the end of the year.
The acquisition last spring of White Weld Co., an old-line investment banking firm, may not have yielded Merrill Lynch all the benefits it expected, Regan candidly admits.
Despite some large-scale defections of personnel at the outset, it has provided Merrill Lynch with a net addition of 20 new offices, more than 200 account executives, a prestigious client list, and a strengthened investment banking and merger and acquisition department where Merrill was previously weak -- all at what Regan calculates is no cost. More about the arithmetic later.
On its own, Merrill Lynch meanwhile is adding another 43 brokerage offices and 825 account executives in 1978, an expansion approximately equal to the total size of such major firms as Drexel Burnham Lambert or Blyth Eastman Dillon.
"They are the IBM of the securities industry," commented Caroly Cole, a vice president with Paine Webber Jackson & Curtis who is one of the few people on Wall Street to follow the publicly held securities firms for investment purposes. "They are dominant, and they have the pricing power and the flexibility if they should choose to use it."
Merrill Lynch's 1977 year-end capitalization of $645.9 million was more than three times as large as runner-up Salomon Brothers, a private partnership, with $189.7 million, according to a tabulation by Finance magazine. E.F. Hutton & Co., the next largest publicly held firm, had capital of $174.7 million at the end of last year.
The ease with which Merrill Lynch can raise more capital was demonstrated recently when the company offered shares at book value to employes as part of an incentive stock purchase plan. It managed to sell 500,000 shares and raise $10.6 million -- more in equity capital than any other Wall Street firm has been able to raise this year.
Merrill Lynch's financial strength has allowed it to pursue the kind of diversification that other retail securities firms also think they must follow, according to Cole.
"The conventional wisdom is that if you're going to survive, you've got to do some, if not all, of the things Merrill Lynch has done -- tie in customers in as many ways as you can, increase your customer base and reduce your cyclicality," she said.
Although its profits are the largest in total, Merrill Lynch ranks only in the middle of the publicly held brokers so far as profit margins or return on equity, Cole noted, part of the price the firm pays for its far-flung network and increasing trading operations where it takes a principal position.
Merrill Lynch last year earned $43.9 million on revenues of $1.1 billion. Its assets at year-end stood at $8 billion. But its after-tax profit margin of 3.9 percent was exceeded by seven of the 14 firms Cole follows.
For the first nine months of 1978, Merrill Lynch and Co. earned $63.3 million on revenues of $1.1 billion as it benefitted along with other Wall Street firms from the heavy volume that has accompanied the stock market's violent moves up and down this year.
With the recent slide in both stock and bond markets, Merrill has taken losses on its own trading positions, said Regan. But it has benefitted from a firming in institutional brokerage rates as the institutions have been more interested in getting execution in a different market than in knocking a few cents off their per-share trading costs. The return on the firm's capital that is committed to customer margin debt also has improved as interest rates have skyrocketed.
"On balance, we're more profitable than not" in the fourth quarter, said Regan.
Regan said the recent diversification moves could not be expected to affect earnings before 1980. Merrill Lynch already has diversified to the point where it gets less than 40 percent of its revenues from commissions, the traditional part of the business.
The Merrill Lynch chairman acknowledged that real estate can be as cyclical as the stock market, but the expectation is that the cycles differ and that the move into real estate not only will provide "an offset to securities income" but will "take some of the wrinkle out of the curve in our earnings."
Regan continued to be sensitive to charges that Merrill Lynch came up empty handed in its purchase of White Weld earlier this year for $50 million.
First, he explained, when Credit Suisse exercised its option to buy out White Weld's 31 percent share of Credit Suisse White Weld -- a prestigious European investment banking susidiary -- this reduced the purchase price to $25 million. Liquidation of some of White Weld's capital raised another $15 million.
And the remaining $10 million represented the value of White Weld's lease holdings in Merrill Lynch's headquarters building in Manhattan's financial district. On top of that, Merrill so far has collected $6 million in fees on White Weld-initiated deals that were under way but were not consummated until after the merger.