Takeover threatens Smith gem

Broker's 'fantastic' New York business considered to be most at risk after board agrees pounds 526m bid
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SMITH NEW COURT'S innovative New York business, whose head Michael Dritz is the biggest single beneficiary of the pounds 526m agreed takeover bid from America's Merrill Lynch, faces big upheaval despite claims that there is an almost perfect fit between the Smith and Merrill operations.

According to Smith's annual report, Mr Dritz stands to gain nearly pounds 5m personally from shares and options. But the operations he heads look the most threatened by the 560p-a-share Merrill offer, which the Smith board recommended on Friday after the largest shareholder, merchant bank NM Rothschild, accepted it.

Meanwhile, industry experts forecast that the creation of the world's largest securities firm could signal higher dealing costs for fund managers and investors.

Merrill proclaimed that its and Smith's businesses were "amazingly complementary" when it announced the agreed offer last week. The lack of overlap in London, where Merrill's trading in British shares is limited but Smith claims a 20 per cent market share, and in Asian emerging markets, is striking.

But Smith's New York business, which packages European, Asian and Latin American shares into dollar-denominated form for convenient sale to wealthy individuals through regional American brokers, faces a dilemma, industry experts say.

The small brokers Smith serves may prove reluctant to do business with a firm now owned by a giant competitor. Dean Eberling, securities industry analyst at Prudential Securities, said: "There is always some overlap and stuff like that has got to go. But that doesn't mean it's a bad deal."

A Smith spokeswoman said: "The New York business has been fantastic for us, particularly thanks to our tailored research service for selected brokers. We quote prices in 5,000 non-US shares in New York and are regularly rated one of the premier firms for international shares." But she admitted that the future strategy for the New York business had not yet been worked out.

Mr Dritz was returning to New York following the announcement of the Merrill deal and unavailable for comment.

Mike Lipper, at New York's Lipper Analytical Services, a leading commentator on the securities industry, said: "Anytime you do a deal, you lose people or you lose clients. But the small brokers can issue their own piece of paper and keep it from their ultimate clients that they are dealing through Merrill."

Mr Lipper, a long-term holder of Smith's shares, added: "This deal allows Merrill to brag once again that it is the world's biggest broker, after losing that title to Nomura. It brings additional market savvy to Merrill, assuming that people do not get out of Smith New Court."

After a period in which institutional - but not private - investors have squeezed brokers' margins, Mr Lipper forecast that the muscle of the new Merrill could help reverse that trend.

A source close to the Smith deal also forecast that the Merrill takeover could help push London towards an "order-driven" system of share trading, instead of the current "quote- driven" system of competing price quotations at which market-makers are prepared to deal. The Securities and Investments Board recently allowed the setting up of Tradepoint, an embryonic order- driven system closer to the one with which Merrill is familiar on the New York Stock Exchange.

Merrill's familiarity with the order-driven approach could give it a competitive advantage over other London firms if it used its new-found weight in the market-making community to push for change.

Michael Marks, the Smith chairman who will become the first ever non- American on Merrill's executive committee, pointed out that Merrill was also used to trading in the Nasdaq over-the-counter market in New York, which resembles the current London system. "My fellow vice-chairman Bobby McCann was just telling me the other day the huge amount of business Merrill does on Nasdaq."

Paul Roy, who is to combine new international responsibilities with being chief executive of the domestic UK business, said that Smith was accustomed to making money in both types of market around the world, but that the order-driven approach was sometimes easier.