A Sweet Deal

It was a little like Macy's acquiring Tiffany's. That great department store of U.S. finance, Manhattan's Merrill Lynch, Pierce, Fenner & Smith, last week took over the leading dealer in the highly sophisticated and eminently profitable market for Government securities, Wall Street's C. J. Devine & Co. The world's largest brokerage house thus got a solid hold on the only important part of the finance business in which it had not been represented. Says one Merrill Lynch vice president: "We knew nothing about the Government bond business."

Fortunes from Fractions. The men who do know the business turn hand some profits--and sometimes incur huge losses--by dealing in tiny fractions. Fluctuations in prices are as small as one sixty-fourth of 1 %, but that can add up to quite a sum in a market in which the U.S. Treasury every Monday auctions off about $3 billion worth of short-term bills to refinance the nation's debt. These bills go to the highest bidding bond dealers, who then sell them for whatever price they can get from banks, corporations and speculators.

Companies buy Government securities in order to put their money to work and nail down safe interest rates; people buy them either to collect the interest or to speculate on the fluctuating prices of bonds, which move around in a range just above or below par value. Another attraction is that low margin requirements permit an investor to buy $100,000 worth of Government securities by putting down as little as $5,000 cash; if the bond's value rises just one-half point, he earns $500. Bond dealers are made or broken by their ability to predict instinctively how much "retail buyers" will be willing to pay. The fractional prices change rapidly, pushed up and down by such factors as bank interest rates, stock dividend rates, rumors of increased Government borrowing, the state of U.S. business and the bond market's elusive "mood." Few dealers had sharper instincts or better knowledge of the market's subtle ripples than Christopher J. Devine, a New Jersey fireman's son who founded his own firm at 28. Working with a fierce intensity that seldom permitted relaxation, Chris Devine opened nine offices around the country, built a staff of more than 200, traded as much as $750 million worth of securities a day. After he died a year ago, two-thirds of the firm's capital of $18 million went to his estate. C. J. Devine's 14 remaining partners were left with only $6,000,000 --hardly enough to organize muscular syndicates for bidding on multibillion-clollar bond issues. The partners went shopping for greater resources.

Access to Power. Wall Street's grapevine brought word of their search to the tenth-floor corner office of Merrill Lynch's chairman, Michael W. McCarthy. He and Merrill Lynch's directors made a unique proposal to Devine's partners: Why not buy up a large chunk of Merrill Lynch's undistributed stock and join the company? After a fortnight of secret negotiations, the two houses agreed on Wall Street's biggest deal this year. Thirteen of the Devine partners anted up $8,000,000 and were taken into Merrill Lynch as a division.

A sweeter deal could scarcely be imagined. The Devine partners got access to the power of Merrill Lynch, whose assets top $1 billion; in addition, all 13 of the men became vice presidents of the brokerage giant (raising its total to 114). As for Merrill Lynch, it acquired the savvy, contacts and good will of a major company without putting up so much as a penny.

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