Merrill Ousts O'Neal, Names Cribiore Interim Chairman

Merrill Lynch & Co. ousted Stan O'Neal as chairman and chief executive officer and said it will begin a search for his successor, leaving the world's biggest brokerage without a leader.

Co-Presidents Gregory Fleming and Ahmass Fakahany will run the firm, reporting to board member Alberto Cribiore, who will be a non-executive chairman until O'Neal's successor is found, New York-based Merrill said in a statement today.

Merrill fell as much as 4.6 percent in New York trading after the firm said no successor is imminent. O'Neal lost the confidence of investors and directors after delivering a $2.24 billion third-quarter loss, six times what the firm forecast just three weeks earlier. Merrill has declined about 30 percent in New York trading this year, the second-worst performance after Bear Stearns Cos. among the five largest U.S. securities firms.

They have to move fast, said Mark Batty, who helps manage about $77 billion including Merrill shares as an analyst at PNC Wealth Management in Philadelphia. They have risk management issues that need to be tackled quickly.

O'Neal, 56, and the board of directors agreed that a change in leadership would best enable Merrill Lynch to move forward, the company said in the statement announcing O'Neal's retirement after 21 years at the firm. The board will consider internal and external candidates, the company said.

List of Candidates

Possible replacements include Laurence Fink, 54, who sold almost 50 percent of the BlackRock Inc. money management firm to Merrill last year, and Fleming, 44, who has spent most of his career as an investment banker at the firm. Another candidate is Robert McCann, 49, who heads Merrill's wealth-management division, including the firm's network of 16,600 brokers.

Merrill lost $2.41 to $65.01 in 1:03 p.m. New York Stock Exchange composite trading. The stock climbed 11 percent in the past two days on speculation O'Neal would go and the company might be a takeover target. Deutsche Bank AG analyst Mike Mayo estimates the firm may be worth $120 a share in an acquisition.

Some investors were probably too optimistic, expecting a quick resolution, said Benjamin Wallace, who helps manage $750 million, including Merrill shares, at Grimes & Co. in Westborough, Massachusetts.

The company said today that Fleming and Fakahany will stay in their jobs as co-presidents and chief operating officers. Cribiore, founder of New York-based private-equity firm Brera Capital, has been a Merrill board member since 2003.

Housing Slump

Merrill reported an $8.4 billion writedown for subprime mortgages, asset-backed bonds and loans gone bad last week, the biggest quarterly debacle in the history of the securities industry.

The loss followed O'Neal's $1.3 billion acquisition of mortgage lender First Franklin Financial Corp. in December. At the time, O'Neal said the purchase would add revenue velocity. Instead, the takeover contributed to losses as the U.S. housing market suffered its worst slump since the 1991 recession.

First Franklin was embarrassing for O'Neal since he had criticized acquisitions made by his predecessor, David Komansky, whose expansion culminated in a $1.7 billion charge in the fourth quarter of 2001. That's now dwarfed by O'Neal's third-quarter loss. Merrill may have to write down another $4 billion in the fourth quarter, said Meredith Whitney, a New York-based analyst at CIBC World Markets, in a note sent to clients last week.

The truth is there's probably an additional writedown coming in the fourth quarter, said Fitzpatrick. Until we get a little more color on that, it's probably a good time to be sitting on the sidelines.

Less Equity

Merrill's $8.4 billion writedown may have wiped out a fifth of shareholders equity, leaving the firm with $38.8 billion of assets minus liabilities. The probability of Merrill defaulting on debt within five years more than doubled since June 30, rising to 7 percent yesterday from 3 percent, according to credit- default swap traders.

Losing 20 percent of shareholders' equity in one fell swoop is a serious blow, said Robert Willens, the accounting analyst at Lehman Brothers Holdings Inc. in New York. It might take them two to three years to earn that capital back.

O'Neal angered the board by approaching Wachovia Corp. Chairman and CEO Kennedy Thompson earlier this month about a possible merger without consulting Merrill directors, the New York Times reported Oct. 26, citing people with knowledge of the matter. The board has discussed replacing O'Neal with candidates, including Fink and NYSE Euronext CEO John Thain, the Times said.

Discretion on Pay

O'Neal, who earned his way through college by working at a General Motors Corp. assembly plant in Georgia, may receive about $160 million to $200 million from Merrill, said James Reda, managing director of James F. Reda & Associates, a New York-based compensation consultant that has analyzed O'Neal's pay package.

Merrill has said in its annual proxy statement that the size of any payment would be at the discretion of the board. O'Neal has received stock bonuses of almost $80 million during the past three years.

O'Neal got a master's degree from Harvard Business School in 1978 and worked as a finance executive at General Motors before joining Merrill as an investment banker in 1986. He was promoted to president in July 2001.

Source - Bloomberg