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Merrill snaps up MAM in unexpected pounds 3.1bn deal

The revolution in global financial markets took an unexpected step yesterday as Merrill Lynch agreed a pounds 3.1bn takeover of Britain's biggest fund manager, Mercury Asset Management.

Tom Stevenson, financial editor, watched another British institution fall into foreign ownership.

Merrill Lynch snapped up Mercury Asset Management yesterday with a pounds 17 a share recommended offer. The surprise deal will create the world's third largest fund manager, catapulting MAM's senior fund managers, Carol Galley and Stephen Zimmerman, to the head of a global investment powerhouse.

MAM, which saw its funds under management recently pass the pounds 100bn mark for the first time, will continue trading under its current name in the UK. Worldwide, Merrill Lynch Mercury will control $450bn (pounds 266bn) of funds, putting it behind only Fidelity and Axa.

The deal is a further blow to British ownership of the world's leading financial organisations. The takeover follows the acquisition by foreign buyers of Morgan Grenfell, SG Warburg, Kleinwort Benson and Barings. Barclays has just agreed to sell its investment banking arm, BZW, to Credit Suisse First Boston and NatWest is rumoured to be considering a sale of its Markets arm to an overseas bank.

The terms of the deal, which valued MAM at 3 per cent of its funds under management, took the City by surprise and sent shares in other fund managers soaring yesterday. When NatWest bought Gartmore recently it paid under 2 per cent of assets under management and yesterday analysts were reassessing the possible value of similar businesses.

M&G, a fund manager with a big retail franchise, saw its shares rise 160p to 1335p, Perpetual jumped 240p to 2475p and Schroders, an investment bank with a big fund management operation, rose 140p to 1815p. MAM's shares closed 380p higher at 1675p.

The pounds 17 a share being paid by Merrill Lynch in cash represents a 31 per cent premium to MAM's share price before the deal was announced. Reflecting an uncharacteristically poor investment performance recently, MAM's shares have underperformed the market this year after outperforming strongly in the 10 years since it was floated off from its parent SG Warburg in 1987.

David Komansky, chairman and chief executive of Merrill Lynch, denied yesterday that the takeover, worth 25 times MAM's earnings last year, represented a classic top-of-bull-market deal. He said MAM was an ideal strategic fit for Merrill, adding that the price reflected the great potential of the combined group.

Fund management is being seen as one of the greatest areas of growth in the financial services. Around the world, deregulation, demographic trends and the withdrawal of governments from welfare provision are creating opportunities that only large fund managers will be able to fully exploit.

The deal will give Merrill a leading position in UK fund management and access to European and Asian markets. For Mercury, the takeover opens up the vast US market where it has so far had almost no presence.

Hugh Stevenson, chairman of MAM, will remain with Merrill Lynch for a year to oversee the integration and is then expected to bow out. His deputy chairman, Mr Zimmerman, and vice chair Ms Galley become joint heads of the combined operation, which will be based in London.

The operations of Merrill and MAM are almost completely complementary and Mr Stevenson promised their would be no redundancies as a result of the takeover. MAM employs 1,300 staff in 19 countries, almost insignificant compared to Merrill's 54,200 employees in 45 countries.

The only question mark over the deal was the likely reaction of MAM's institutional clients to its change of ownership. Nigel Taylor, a pensions consultant, who advises several Mercury clients, said: "MAM have been going through a difficult period, performance-wise on their pension fund assets. This on top is going to unnerve people."

Outlook, page 25