The North American Variant

by Bruce W. Barren
The EMCO/Hanover Group

Merchant banking services in North America range from the very specialized to full service. Yet, the traditional European-style is not what most of today's North American merchant bankers are providing.


In late 17th and early 18th century Europe, the largest companies of the world were merchant adventurers. Supported by wealthy groups of people and a network of overseas trading posts, the collected large amounts of money to finance trade across parts of the world. For example, The East India Trading Company secured a Royal Warrant from England, providing the firm with official rights to lucrative trading activities in India. This company was the forerunner in developing the crown jewel of the English Empire. The English colony was started by what we would today call merchant bankers, because of the firm's involvement in financing, negotiating, and implementing trade transactions.

The colonies of other European countries were started in the same manner. For example, the Dutch merchant adventurers were active in what is now Indonesia; the French and Portuguese acted similarly in their respective colonies. The American colonies also represent the product of merchant banking, as evidenced by the activities of the famous Hudson Bay Company. One does not typically look at these countries' economic development as having been fueled by merchant bank adventurers. However, the colonies and their progress stem from the business of merchant banks, according to today's accepted sense of the word.


Merchant Banking, as the term has evolved in Europe from the 18th century to today, pertained to an individual or a banking house whose primary function was to facilitate the business process between a product and the financial requirements for its development. Merchant banking services span from the earliest negotiations from a transaction to its actual consummation between buyer and seller.

In particular, the merchant banker acted as a capital sources whose primary activity was directed towards a commodity trader/cargo owner who was involved in the buying, selling, and shipping of goods. The role of the merchant banker, who had the expertise to understand a particular transaction, was to arrange the necessary capital and ensure that the transaction would ultimately produce "collectable" profits. Often, the merchant banker also became involved in the actual negotiations between a buyer and seller in a transaction.


During the 20th century, however, European merchant banks expanded their services. They became increasingly involved in the actual running of the business for whom the transaction was conducted. Today, merchant banks actually own and run businesses for their own account, and that of others.

Since the 18th century, the term merchant banker has, therefore, been considerably broadened to include a composite of modern day skills. These skills include those inherent in an entrepreneur, a management advisor, a commercial and/or investment banker plus that of a transaction broker. Today a merchant banker is who has the ability to merchandise -- that is, create or expand a need -- and fulfill capital requirements. The modern European merchant bank, in many ways, reflects the early activities and breadth of services of the colonial trading companies.

Most companies that come to a U.S. merchant bank are looking to increase their financial stability or satisfy a particular, immediate capital need.

Professional merchant bankers must have: 1) an understanding of the product, its industry and operational management; 2) an ability to raise capital which might or might not be one's own (originally merchant bankers supplied their own capital and thereby took an equity interest in the transaction); 3) and most importantly, effective skills in concluding a transaction - the actual sale of the product and the collection of profit. Some people might question whether or not there are many individuals or organizations who have the abilities to fulfill all three areas of expertise.


Merchant banking services in the U.S., however, have been undertaken by highly specialized "boutiques", where each offers its own specialized service. The typically charge fee income for each service, and transactions are oriented toward short- term deals rather than long-term relationships.

Very few offer the complete range of services that are available through traditional European merchant banks. In fact, most companies that come to a U.S. merchant bank are looking primarily to increase their financial stability or satisfy a particular, immediate capital need. They are not looking for the actual "on-line" operating advice and assistance required to complete the traditional merchant banking process.


In providing financial assistance, merchant banks offer a full understanding of all facets of the capital markets. This includes all types of debt and equity financing available from both the domestic and international markets. A merchant banker, cognizant of capital costs, looks for the best sources of capital, including its restrictions and dollar limitations.

It should be understood that interest rates are not the only definition of capital costs. Restrictions on availability, prepayment terms, and operating effectiveness can often outweigh what might appear to be inexpensive capital with low interest rates. Too often, capital includes costs which force an entrepreneur or a business to undertake undesirable actions. In the short-run, some actions might be necessary, but often in the long-run are detrimental. The traditional merchant banker understands these capital limitations and can structure a transaction which is beneficial to all sides of the table -- not just the capital source.

He also knows how to substitute one type of capital for another, sometimes utilizing internal sources from asset repositioning or cash creation from improvements in working capital. He understands fully the risk versus return elements necessary to complete the capital procurement process.


There are many merchant bankers operating in North America today, both large and small, though only a subset offer a full range of services. Before selecting a merchant banker, one should decide what services are required. Is it capital, general management consulting, supervision of an existing investment, a joint venture, or merger/acquisition assistance to spot and consummate a distribution, product or manufacturing opportunity that one requires?

It is paramount to know who in such an organization is best qualified to fill these needs. Also, selection of the merchant banker depends on whether one needs to satisfy a short or a long-term objective, or both.

In the final analysis, it is the personal relationship between the parties that will determine the chances of success. One may find that the smaller merchant banking companies are both comprehensive in their services and reliable. They may effectively handle all transaction elements, while remaining within one's cost parameters. Moreover, these smaller firms can offer more personalized services, better performance and quicker responses to a client's needs.

Locating a merchant bank that fits a particular need can be as difficult as the transaction itself. Even though there are such directories as that published by the American Bankers' Association, the National Association of Security Dealers and the Directory of Corporate Finance, there are no sources that evaluate the abilities of North American merchant bankers. For each transaction's needs, one must assess the skills of a merchant banker while examining the firm's performance record.

About the author:

Bruce W. Barren has been Group Chairman of the EMCO/Hanover Group since its founding in 1971. EMCO has concluded more than $3 billion in financial transactions worldwide as international merchant bankers.

Mr. Barren has been honored in California by various municipal and county governments as well as the State Assembly and Senate for having helped turn around over 100 businesses. He has written numerous articles on corporate finance, mergers/acquisitions, and on-line management. He has also lectured to professional societies and taught courses in California's Continuing Professional Education program.

Bruce W. Barren