Tags: Merrill Lynch

Embattled Merrill Lynch CEO Ousted Over Losses, Merger Overtures

By , Money Morning •

By Jason Simpkins
And William Patalon III
Money Morning Editors

Stan O'Neal, the embattled chief executive officer of Merrill Lynch & Co. Inc. (MER) will be ousted at any time, with only the terms of his departure still to be finalized, according to published reports.

Although some early reports yesterday (Monday) stated that O'Neal had volunteered to leave Merrill Lynch as the cacophony of negative press spiraled higher and higher, by late in the trading day most reports stated he'd been ousted by a highly peeved board of directors. In fact, The Wall Street Journal described O'Neal's split with Merrill as a "forced departure."

The Merrill Lynch board will likely conduct a broad search - both inside and outside the investment-banking company - for O'Neal's successor, the reports stated, most of them citing unnamed sources close to the company.

The New York-based Merrill has in recent weeks been the focus of scathing media and analyst reports after it badly misjudged the severity of its own subprime mortgage losses. Last week, in reporting its biggest quarterly loss in 93 years, Merrill wrote off $8.4 billion in subprime debt and other obligations.

But what really stunned Wall Street about the third-quarter earnings report was the fact that Merrill clearly didn't have a clue about the depth of its problems. Not only was the $8.4 billion hit nearly double what the firm had predicted only three weeks before, the write-downs of subprime mortgages, asset-backed bonds and leveraged loans combined to generate a third-quarter loss of $2.24 billion - six times the company's initial estimate.

When Merrill's plan for reducing its remaining overall debt exposure also failed to reassure Wall Street, the investment-banking firm found that it had lost even more credibility. And some analysts predicted that Merrill might well be looking at $4 billion in additional write-offs in the fourth quarter, according to Forbes.com.

O'Neal shouldered much the blame afterwards, even admitting himself that the company was not adequately protected from the subprime mortgage collapse.

As bad as the company's financial performance has been, it was apparently O'Neal's failure to inform his board of directors about some merger talks he'd held that sealed his fate, The New York Times reported. On Friday, revelations surfaced that O'Neal floated the idea of a merger deal past Ken Thompson, CEO of the Charlotte-based Wachovia Corp. (WB) - without first informing board members. When his attempted maneuverings became public, the board soon decided that O'Neal should be dismissed.

Candidates to replace O'Neal as head of the securities giant include Laurence Fink, chairman and CEO of the investment firm BlackRock Inc. (BLK), and Gregory Fleming, Merrill's co-president, according to a media report. O'Neal headed deal talks last year in which Merrill sold its asset-management business to Fink's company in exchange for a 49% ownership stake in BlackRock.

With a new management team coming in, the speculation about additional write-downs might well become a reality, Deutsche Bank analyst Mike Mayo wrote in a research note Sunday night. The new CEO - wanting to make a decisive statement for Wall Street - is likely to adopt a "more conservative" approach than O'Neal to valuing the collateralized debt obligations (CDOs) that remain on Merrill's balance sheet. [CDOs combine slices of assorted types of debt into a tradable financial instrument backed by that debt].

Deutsche Bank's Mayo estimates that Merrill would have to write down another $4 billion worth of its CDOs to make that happen. The result: Merrill will have to deal with a second straight quarter of operating losses.
Mayo said a new CEO would face three challenges in taking the helm at Merrill:

  • Get the financial numbers right and restore investor confidence.
  • Regain credibility and trust with investors.
  • And address the lack of risk controls without hampering the innovation and corporate culture that pervades "the 7/8ths of the company that is performing well."

In a research note and in media interviews, Punk Ziegel & Co. analyst Dick Bove - whose analyses of financial firms during the credit crisis have proved prescient time and again - was skeptical that forcing out O'Neal would, by itself, be enough to fix Merrill.

"Pin the tail on O'Neal, blame him for all of the company's current problems, and kick him out," Bove told The Associated Press. Then bring a white knight in and immediately resolve these problems and, possibly, in the process, merger Merrill out of existence, so that everyone will make their fortunes."

However, such an outcome may not be realistic, Bove said, further expressing his skepticism in a research note, CNNMoney.com reported.
Wrote Bove: "Can a company with an estimated $1 trillion-plus in assets and tens of thousands of employees spread out over multiple businesses and in multiple countries be turned around simply by changing the CEO?"

Merrill's shares closed yesterday at $67.42, up $1.33, or 2.01%, per share. In the last 52 weeks, the shares have traded between $59.14 and $98.68 each.

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