April 27, 2012 / 1:30 PM / 7 years ago

Wells Fargo buying prime brokerage firm Merlin

(Reuters) - Wells Fargo & Co (WFC.N) is buying a prime brokerage firm in its first foray into the business of providing trading, reporting and other services for hedge funds.

A Wells Fargo bank is seen in Del Mar, California January 17, 2012. REUTERS/Mike Blake

The acquisition of Merlin Securities LLC gives the No. 4 U.S. bank a platform for growing in the prime brokerage business and for selling other products and services to hedge funds, said Chris Bartlett, Wells Fargo’s head of equity sales and trading.

“It’s a way for us to wade into the business and grow over time,” Bartlett said in an interview.

San Francisco-based Wells Fargo did not disclose the terms of the acquisition. Merlin, based in New York and San Francisco, serves more than 500 hedge funds, each with less than $2 billion in assets, but Wells could eventually target larger firms, Bartlett said.

Merlin’s 100 employees will join Wells Fargo Securities, the bank’s capital markets and investment banking unit. Merlin’s managing partners, Stephan Vermut and Aaron Vermut, will continue to lead the business.

The deal, subject to regulatory approvals, is expected to close in the third quarter. Wells has been active on the acquisition front in recent months, mostly buying loan portfolios from European banks looking to build capital. on Tuesday, Wells finalized its purchase of a North American energy-lending business from BNP Paribas SA (BNPP.PA).

Wells emerged from the financial crisis as one of the healthier U.S. banks, partly because it eschewed some of the riskier capital markets activities that damaged some of its peers. The bank became a bigger player in these businesses when it bought Charlotte, North Carolina-based Wachovia Corp in 2008, but Chief Executive John Stumpf has emphasized Wells only likes the client-driven part of the business, not riskier trading ventures.

Bartlett said Merlin brings minimal risk to Wells because it is essentially a processing business. The firm sends clients needing loans to Goldman Sachs Group Inc (GS.N) and JPMorgan Chase & Co (JPM.N). Wells over time will make loans to hedge funds, but clients will be able to still choose to do business with Goldman or JPMorgan, he said.

“The Wells way is very thoughtful and gradual,” Bartlett said. “We will grow with the client base.”

Merlin is the second hedge fund-related acquisition by Wells in the past year. In September, it bought LaCrosse Global Fund Services, which provides hedge fund administration services. The two businesses will continue to operate separately, Bartlett said.

Wells Fargo’s wholesale banking unit, which includes capital markets and investment banking businesses, reported a first-quarter profit of $1.9 billion, up 14 percent from a year ago. The unit accounted for 41 percent of the bank’s net income.

Wells Fargo shares were down 1 cent to $33.83 in early afternoon trading on a mixed day for bank stocks.

Reporting By Rick Rothacker in Charlotte, North Carolina; Editing by Gerald E. McCormick, Dave Zimmerman and Tim Dobbyn

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