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Johnson & Company - Private Merchant Bankers
Johnson & Company (J:CO) has been an active private merchant banking firm since 1974. Our client base, though centered around the South, is predominantly focused in the states of Florida and Louisiana with past activity in Colorado, Georgia, Mississippi, New Mexico, and Texas.

The traditional services of a European-style merchant bank is not what we provide, nor does J:CO offer the complete range of services that are available through many North American merchant banks. Johnson & Company is rather a very specialized, “boutique” banking house, acting as a capital source.

Our primary activity is directed towards underperforming or distressed, small family-owned/closely held concerns. We seek to increase a company’s financial stability and satisfy a particular, immediate capital need by employing skills inherent in an entrepreneur, management advisor, commercial and/or investment banker plus that of a transaction broker.

Johnson & Company has the ability to raise capital which might or might not be our own, and occasionally, we take an equity interest in the transaction though fee income is typically charged for each service and transactions are oriented toward short-term deals rather than long-term relationships. Often, we become involved in the actual negotiations between a buyer and seller in a particular transaction.

Our traditional PMB services have always included marketing, research, mergers and acquisitions, management buyouts, joint ventures, restructures, divestitures, workouts, and turnarounds.

Being true real estate arbitrageurs, J:CO contracts for the purchase of distressed or foreclosed commercial properties then simultaneously reassigns and transfers the purchase contracts before takedown. In certain cases, we proceed through close after locking in the fixed cost of borrowing and awaiting a drop in interest rates while generating cash flow to cover other costs. We are always looking for significant opportunities to directly benefit by realizing leveraged appreciation from market growth and inflation. Our usual objective is to successfully wholesale or retail the properties for our own account in a timely fashion following any required rehab and improvement of cash flows.

The firm's services have expanded over the years. We have become more involved in the actual running of many businesses for whom transactions were initially conducted, sometimes owning and running businesses for our own account or that of others.

J:CO continues to facilitate placement of financing as a direct lender and from both private and institutional sources and coordinates capital injections from a broad array of corporate lending alliances and equity funding partners. We often employ integrated strategies for successful results.

Johnson & Company now collaborates with a select group of Conventional, SBA, USDA and Other Financing Affiliates on a daily basis to garner construction, working capital, refinance and purchase loans for our clients.

The Merchant Bank Defined
A Merchant bank is a financial institution which provides capital to companies in the form of share ownership. A merchant bank also provides advisory on corporate matters to the firms they invest in. In the United Kingdom, the term "merchant bank" refers to an investment bank.

Today, according to the U.S. Federal Deposit Insurance Corporation (acronym FDIC), "the term merchant banking is generally understood to mean negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies"(1). Both commercial banks and investment banks may engage in merchant banking activities. Historically, merchant banks' original purpose was to facilitate and/or finance production and trade of commodities, hence the name "merchant". Few banks today restrict their activities to such a narrow scope.

Merchant Banking History
Merchant banks are in fact the original banks. These were invented in the Middle Ages by Italian grain merchants. As the Lombardy merchants and bankers grew in stature based on the strength of the Lombard plains cereal crops, many displaced Jews fleeing Spanish persecution were attracted to the trade. They brought with them ancient practices from the Middle and Far East silk routes. Originally intended for the finance of long trading journeys, these methods were applied to finance the production and trading of grain.

In France during the 17th and 18th century, a merchant banker or marchand-banquier was not just considered a trader but also received the status of being an entrepreneur par excellence. Merchant banks in the United Kingdom came into existence in the early 19th century, the oldest being
Barings Bank.

The Jews could not hold land in Italy, so they entered the great trading piazzas and halls of Lombardy, alongside the local traders, and set up their benches to trade in crops. They had one great advantage over the locals. Christians were strictly forbidden the sin of usury, defined as lending at interest (Islam makes similar condemnations of usury). The Jewish newcomers, on the other hand, could lend to farmers against crops in the field, a high-risk loan at what would have been considered usurious rates by the Church; but the Jews were not subject to the Church's dictates. In this way, they could secure the grain-sale rights against the eventual harvest. They then began to advance payment against the future delivery of grain shipped to distant ports. In both cases, they made their profit from the present discount against the future price. This two-handed trade was time-consuming, and soon there arose a class of merchants who were trading grain debt instead of grain.

The Jewish trader performed both financing (credit) and underwriting (insurance) functions. Financing took the form of a crop loan at the beginning of the growing season, which allowed a farmer to develop and manufacture (through seeding, growing, weeding, and harvesting) his annual crop. Underwriting in the form of a crop, or commodity, insurance guaranteed the delivery of the crop to its buyer, typically a merchant wholesaler. In addition, traders performed the merchant function by making arrangements to supply the buyer of the crop through alternative sources—grain stores or alternate markets, for instance—in the event of crop failure. He could also keep the farmer (or other commodity producer) in business during a drought or other crop failure, through the issuance of a crop (or commodity) insurance against the hazard of failure of his crop.

Merchant banking progressed from financing trade on one's own behalf to settling trades for others and then to holding deposits for settlement of "billette" or notes written by the people who were still brokering the actual grain. And so the merchant's "benches" (bank is derived from the Italian for bench, banco, as in a counter) in the great grain markets became centers for holding money against a bill (billette, a note, a letter of formal exchange, later a bill of exchange and later still a cheque).

These deposited funds were intended to be held for the settlement of grain trades, but often were used for the bench's own trades in the meantime. The term bankrupt is a corruption of the Italian banca rotta, or broken bench, which is what happened when someone lost his traders' deposits. Being "broke" has the same connotation.

A sensible manner of discounting interest to the depositors against what could be earned by employing their money in the trade of the bench soon developed; in short, selling an "interest" to them in a specific trade, thus overcoming the usury objection. Once again, this merely developed what was an ancient method of financing long-distance transport of goods.

The medieval Italian markets were disrupted by wars and, in any case, were limited by the fractured nature of the Italian states. And so, the next generation of bankers arose from migrant Jewish merchants in the great wheat-growing areas of Germany and Poland. Many of these merchants were from the same families who had been part of the development of the banking process in Italy. They also had links with family members who had, centuries before, fled Spain for both Italy and England. As non-agricultural wealth expanded, many families of goldsmiths (another business not prohibited to Jews) also gradually moved into banking. This course of events set the stage for the rise of Jewish family banking firms whose names still resonate today, such as
Warburgs and Rothschilds.

The rise of Protestantism, however, freed many European Christians from Rome's dictates against usury. In the late 18th century, Protestant merchant families began to move into banking to an increasing degree, especially in trading countries such as the United Kingdom (Barings), Germany (Schroders, Berenbergs), and the Netherlands (Hope & Co.) At the same time, new types of financial activities broadened the scope of banking far beyond its origins. The merchant-banking families dealt in everything from underwriting bonds to originating foreign loans. For instance, bullion trading and bond issuance were two of the specialties of the Rothschilds. In 1803, Barings teamed with Hope & Co. to facilitate the Louisiana Purchase.

In the 19th century, the rise of trade and industry in the U.S. led to powerful new private merchant banks, culminating in J.P. Morgan & Co. During the 20th century, however, the financial world began to outgrow the resources of family-owned and other forms of private-equity banking. Corporations came to dominate the banking business. For the same reasons, merchant banking activities became just one area of interest for modern banks.

Here is a list of merchant banks of the past and present:

Modern practices

Known as “accepting and issuing houses” in the U.K. and “investment banks” in the U.S., modern merchant banks offer a wide range of activities, including issue management, portfolio management, credit syndication, acceptance credit, counsel on mergers and acquisitions, insurance, etc.

Of these two classes of merchant banks, the U.S. variant initiates loans and then sells them to investors.(2) Even though some of these companies call themselves "merchant banks," they have few, if any, of the characteristics of former merchant banks.

References

^ Merchant Banking: Past and Present
^ Fitch, Thomas P. [1990](2000)Dictionary of Banking Terms: Merchant Bank 4th Edition New York: Barron's Business Guides ISBN 0-7641-1260-0
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Categories: International trade / Banks