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.
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Tuesday, October 30, 2007
Merrill Ousts O'Neal, Names Cribiore Interim Chairman
Wednesday, October 24, 2007
Merrill Lynch Reports Loss on $8.4 Billion Writedown
Merrill Lynch & Co. reported the biggest quarterly loss in its 93-year history after taking $8.4 billion of writedowns, almost double the firm's forecast three weeks ago.
The writedowns on subprime mortgages, asset-backed bonds and leveraged loans led to a third-quarter loss of $2.24 billion, or $2.82 a share, six times more than Merrill estimated on Oct. 5. Chief Executive Officer Stanley O'Neal said today that the New York-based firm may sell assets to shore up its balance sheet.
Merrill's stock fell the most in five years, its credit rating was cut and the perceived risk of default on the company's bonds rose after O'Neal said the firm misjudged the severity of the decline in debt markets since July. Investors who lauded the 56-year-old CEO for chasing higher returns as the biggest underwriter of securities backed by subprime loans now question his management. O'Neal said the firm increased the writedown after a more conservative analysis of its holdings.
We're very disappointed, said Rose Grant, who helps manage about $2 billion at Eastern Investment Advisors in Boston, including Merrill shares. I don't think Stan O'Neal will step down, but you do have to look at top management and wonder why they didn't know the extent of this loss.
Standard & Poor's, Fitch Ratings and Moody's Investors Service lowered their assessments of Merrill's credit. S&P cut its rating on Merrill's senior unsecured debt to A+ from AA-, describing the quarter's loss as startling and citing management's miscues that raised concern about the firm's risk controls and business strategy.
Financial stocks sank, led by Merrill, which dropped 5.8 percent to $63.22 in New York Stock Exchange trading. Lehman Brothers Holdings Inc., the largest U.S. underwriter of mortgage bonds, declined 1.5 percent to $57.42. Bear Stearns Cos., the second-biggest, fell 2.3 percent to $113.54.
Merrill's third-quarter revenue fell 94 percent to $577 million, as losses in the fixed-income division overshadowed gains from underwriting stocks and providing merger advice. At Merrill's retail brokerage, the nation's biggest with a network of 16,610 financial advisers who cater to individual investors, revenue climbed 23 percent to $3.27 billion.
O'Neal, on a conference call with analysts, said he was continuing to resize the firm's balance sheet. He also said he's weighing potential divestitures of non-core businesses.
Merrill's compensation costs fell by 49 percent from a year earlier to $1.99 billion, indicating that the quarter's losses may reduce year-end bonuses for some of Merrill's 64,200 employees. The firm said today that it remains focused on paying its best performing employees competitively.
`Remaining Impact'
We expect market conditions for subprime mortgage-related assets to continue to be uncertain and we are working to resolve the remaining impact from our positions, he said in the company statement.
Merrill also wrote down the value of leveraged buyout loans the firm couldn't sell to investors by $463 million, after underwriting fees.
Merrill's writedown exceeded Citigroup Inc.'s $6.5 billion and increased to more than $30 billion the total third-quarter cost for bad loans and trading losses reported by the world's biggest securities firms and banks.
