2nd UPDATE: Julius Baer Buys Merrill Unit, Sets Rights Issue

-- Transaction worth up to CHF860 million based on 1.2% of CHF72 billion in acquired assets under management

-- Julius Baer sets CHF750 million rights issue

-- Deal bolsters Swiss private bank's presence in growth markets

-- Deal is big for Julius Baer, but small for Bank of America

(Adds background and detail throughout.)

By Anita Greil and Neil MacLucas

ZURICH-Julius Baer Holding AG (BAER.VX) on Monday said it will acquire Merrill Lynch's wealth-management business based outside the U.S. and Japan from Bank of America Corp. (BAC) and raise fresh equity to finance the deal, as the Swiss private-banking specialist seeks to widen its global footprint and reduce its reliance on Switzerland.

Julius Baer said it will pay up to 860 million Swiss francs ($880 million) in cash and shares to Bank of America. It may end up paying less, if fewer Merrill Lynch clients than expected transfer their assets to the Swiss bank. The American bank's businesses will be transferred over the next two years, during which times its clients will be invited to move their assets to the Swiss Bank. This process should be completed by early 2015, Julius Baer said.

It is a huge deal for Julius Baer, but a minor one for the seller, which has been shedding non-core assets over the past year in an effort to make the banking smaller and better manageable.

Julius Baer, based in Zurich, is Switzerland's biggest pure private bank, but with assets under management of close to CHF180 billion it is still a mignon compared with UBS AG (UBS) and Credit Suisse (CS), which also have big investment banking businesses, and manage assets worth more than four times as much for rich clients.

But the smaller rival has been smart at adapting to a rapidly changing environment for banks that cater to the rich. It expanded aggressively in Asia at a time when European clients--worried about the region's economic problems--were growing ever more reluctant to hold anything but cash, a trend that has reduced revenue from trading and commissions for all banks. Julius Baer already derives around a third of income from growing markets in Asia and the Middle East, and will increase this share to 50% through the deal.

"This acquisition brings us a major step forward in our growth strategy and will considerably strengthen our leading position in global private banking by adding a new dimension not only to growth markets but also to Europe," Julius Baer Chief Executive Boris Collardi said.

Julius Baer will take on 2,000 Merrill Lynch staff, including 500 financial advisers, as it expands its private-banking network to include Bahrain, India, Luxembourg, Panama and Spain, among others. Merrill Lynch has agreed to provide some products and services to Julius Baer as part of the deal.

Mr. Collardi has been hunting for international assets for some time to broaden Julius Baer's client base beyond Switzerland and Europe. The Merrill Lynch deal follows last month's commercial agreement with Bank of China Ltd., in which Julius Baer and the Chinese bank agreed to refer clients to each other and jointly market some investment products.

Late last year, the Swiss bank lost out to Brazilian-Swiss private bank Safra Group for a controlling stake in Bank Sarasin & Cie. Safra paid CHF1.04 billion to buy the stake in Basel-based Sarasin from Dutch banking cooperative Rabobank last November.

Julius Baer said it will use existing funds and raise new equity over and above that needed to finance the Merrill Lynch transaction to bolster its finances. The bank will sell stock worth CHF740 million, of which CHF240 million will be issued to BofA. Some of the equity raised will give Julius Baer the flexibility to make more deals without having first to ask shareholders for cash to finance an acquisition, said Chief Financial Officer Dieter A. Enkelmann.

Julius Baer considers itself a consolidator in the industry, as Mr. Collardi pushes gaining scale as the best way to deal with the pressure it is facing on margins. In June, the bank warned that profitability and private-banking margins were declining because of falling risk appetite among investors and reduced client activity.

Swiss private banks also have been looking for ways to protect earnings as a result of the U.S. crackdown on tax havens that is bringing an end to the traditionally secretive Swiss banking model. Julius Baer is one of 11 Swiss banks under investigation by U.S. authorities looking into allegations the banks helped Americans evade taxes.

Clients want good returns rather than just have their assets protected from taxes, which means banks have to focus much more on investment advice. This is likely to lead to more mergers and acquisitions between banks as the new service requires heavy spending on information technology and personnel. Larger banks are expected to snap up the smaller, unlisted banks as part of the industry consolidation.

Perella Weinberg Partners acted as exclusive financial advisor to Julius Baer Group on the transaction.

Julius Baer shares fell sharply on the deal, which analysts considered expensive and fraught with risk as fewer clients than expected may decide to transfer their assets.

At 1240 GMT, shares were down CHF2.18, or 6.2%, at CHF33.25, making them the worst performer on a largely unchanged Swiss market.

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