VideoVolatility in the capital markets might roil some executives, but not Jeff Edwards. In his 20 years with Wall Street giant Merrill Lynch, Edwards has seen plenty of market corrections, but he remains a firm believer in the value of long-term investing and diversification. Coming off a year in which Merrill earned record profits of $7.5 billion, advised (and invested) in the consortium that completed the $21 billion HCA Inc. deal, made six bolt-on acquisitions, and merged its asset-management business with Black Rock Inc., CFO Edwards, 46, is on a roll. Of course, any slowdown in merger-and-acquisition activity or further concerns about conflicts of interest (the Securities and Exchange Commission has renewed its scrutiny of insider-trading risks, including banks' trading ties to hedge funds) could spoil the party. But even a 416-point plunge in the Dow, which took place just before Edwards sat down with CFO, left him undaunted. "The markets will allow us to continue to grow over a long period of time," he says.
How much of your recent success can be attributed to the boom in private equity — specifically to the deals you've done with your own capital?
We have seen private equity play a role in our results really since the second quarter of 2005. So it's a relatively short history, and in generally favorable markets, at a time when transactions have cycled from going private to going public again fairly quickly. Now I would guess that, over the course of a full cycle, that process would generally take longer than we've seen over the last few yearsÂ…. But I also believe we've been very effective at executing that strategy and in making sure we've been very prudent with the investments we've made.
That strategy led to record earnings last year. But you also acquired 17 companies and merged your asset management business with Black Rock Inc. Will such deals fuel growth going forward, or is it going to be more organic?
Our first focus is absolutely organic growth. We look at acquisitions and strategic transactions as ways that we can accelerate that growth. And in the case of those 17 odd transactions they really fit the prescription.... In many cases, what we’ll try to do is establish a platform that we can then grow more aggressively than [the acquisitions could] grow by themselves. A good example has been the success that we’ve seen in our commodity business, where we acquired a trading platform and expanded it geographically to Asia, [and] expanded it by product, opening up oil and coal trading and now metal trading capabilities.
Can the good times last for private equity overall?
Private equity is a business that will also go through cycles. But over a full cycle, we think it offers very attractive investment opportunities. And it has been proven over several cycles dating back to the beginning of the private-equity business — at this point more than 25 years ago.
You're advising on such deals at the same time you have a private-equity business yourself. Is there a risk of alienating some of your best customers?
It's certainly something we pay close attention to. In general, we're working on transactions where our interests and our clients' interests are aligned and that we can manage very effectively. Part of that is the structure that we've adopted.... We've invested our company's own money, which has allowed us to look at transactions in their totality for what is in the best interest of Merrill Lynch and our clients.... But we recognize that there's potential uncertainty.
Will there be any slowdown in the deals that you do with your own capital?
We don’t have a specific target for how much we’re going to invest, [and] in what time period, because it’s really dependent on when we see the opportunities. It’s critical to be selective in that business.
The buyout of HCA was done on a consortium basis — a club deal — a process the Department of Justice is now looking into. Are you worried about regulatory backlash?
I won't comment on any matters related to the Department of Justice or any other such inquiries, other than to say that it's our policy, obviously, to cooperate in any investigation. But with large transactions — something like the size of HCA — it's hard to envision how...it wouldn't be appropriate to have consortia involved in putting those bids together based on the size of the equity that needs to be invested.
It appears the $45 billion TXU Energy deal — the largest private equity deal to date — will also be done on a consortium basis.
These are just very large deals that require a lot of equity, and it’s the nature of portfolio management that says you should only have so much risk concentrated in single investments.... [The same is true] on the underwriting side, when you’re looking at large debt transactions. The nature of those commitments requires syndications because the size of the debt commitments are larger than it’s prudent for any one player to commit to.
Reader Comments» Post a comment