WSJ: does Merrill Lynch have a private equity time bomb on their hands?

Yet again, Merrill Lynch & Co, Inc. (NYSE:MER) had a strong quarter, with net income surging 68% to $2.35 billion. There was strength in trading, asset management and of course, investment banking.

But there was another key source of income: investments in buyout deals. And, according to a recent piece in the Wall Street Journal [a paid service], it does pose serious risks.

True, it's lucrative. After all, Merrill also scores big fees on the private equity transactions. Yet, Merrill is making some big bets. For example, it shelled out $1.5 billion for its stake in HCA. This is a hospital chain that must deal with unpredictable government regulations. Also, the deal was done at a fairly high valuation.

So far, though, Merrill's private equity forays have been getting nice returns, especially with the Hertz Global Holdings, Inc. (NYSE:HTZ) deal. But there are many things that can go wrong: a botched deal; a credit crunch; a recession; a bear market.

Interestingly enough, back in the early 1990s, Merrill left the buyout business. Yes, it was because of some ill-conceived deals.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.