Merrill CEO under pressure to resign on record loss
Wednesday, 31 October 2007
Bradley Keoun
Stan O'Neal is facing pressure to abandon his post as chairman and chief executive officer of Merrill Lynch & Co. after misjudging the contraction in credit markets and posting the firm's biggest-ever quarterly loss.
Merrill's directors met last week to discuss his potential departure and may make a decision this weekend, the Wall Street Journal reported, citing people familiar with the matter. The New York Times said O'Neal discussed a possible merger with Wachovia Corp., angering his board. CNBC reported that he told friends he'll probably be out of a job this weekend.
Merrill surged the most in five years in New York trading Friday on speculation O'Neal, 56, will be ousted and the world's largest brokerage will become a takeover target. The bid to replace O'Neal is being led by board member Armando M. Codina, the Financial Times reported.
``His time is up,'' said James Cullen, president of Schafer Cullen Capital Management Inc., which oversees $10 billion including 1.2 million Merrill shares as of Sept. 30. ``You can see from the reaction in the stock that any change of management would be good.''
O'Neal lost the confidence of investors earlier last week after posting a $2.24 billion quarterly loss, the biggest in Merrill history and six times the amount the New York-based firm forecast just three weeks earlier. Deutsche Bank AG analyst Mike Mayo said in a report yesterday that Merrill might fetch $100 to $120 a share in a takeover.
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 on Oct. 24, after O'Neal said the firm misjudged the severity of the decline in debt markets since July.
Investors who lauded him for chasing higher returns as the biggest underwriter of securities backed by subprime loans now question his management.
O'Neal broached the possibility of a merger late last week in a call to Wachovia Chairman and CEO Ken Thompson without consulting Merrill directors, the Times said, citing people with knowledge of the matter. The board discussed possible candidates to replace O'Neal including BlackRock Inc. CEO Laurence Fink and NYSE Euronext CEO John Thain, the newspaper said.
Greg Fleming, Merrill's co-president, and Robert McCann, the head of the firm's retail brokerage, are also among the potential replacements and an arrangement in which they share power is a possibility, the Journal reported on its Web site yesterday.
``We don't comment on rumors,'' said Merrill spokeswoman Jessica Oppenheim. Fleming, 44, and McCann, 49, didn't return phone calls seeking comment.
Investors drove Merrill shares down 9.3 percent in the two days after the largest U.S. brokerage reported its loss. Under O'Neal's leadership, the firm acquired subprime mortgage lender First Franklin Corp. for $1.3 billion in December, just as the real-estate market peaked.
He announced an $8.4 billion writedown Oct. 24 on loans and bonds backed by mortgages, almost twice as large as the firm estimated 19 days earlier.
Credit-default swaps tied to Merrill Lynch's bonds fell 4 basis points yesterday to 83 basis points, according to broker Phoenix Partners Group in New York. The five-year contracts, used to speculate on the company's ability to repay its debt or hedge against the risk of default, decline as investor confidence improves.
``O'Neal is under fire,'' said Patrick Lemmens, who helps manage 2.5 billion euros ($3.6 billion) of financial stocks at ABN Amro Asset Management in Amsterdam and doesn't own Merrill shares. ``If Merrill were doing very well and he had done this, it would be probably no problem at all.''
Merrill board member Codina wants O'Neal to leave after he discussed a possible merger with Wachovia without prior approval from the board, the FT said, citing people familiar with the matter.
The board's reaction indicates that a merger isn't likely for the moment, though it may add to pressure to replace O'Neal, the Times said, citing unidentified people close to the firm. A merger of Wachovia, the fourth-biggest U.S. bank by market value, and Merrill, the third-biggest securities firm, probably would come under regulatory scrutiny, the newspaper reported.
``The idea that O'Neal's pushing for the sale of the company is the nail in the coffin,'' said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, and author of ``100 Years of Wall Street. ``It's another case of a Wall Street CEO who got away with too much after being given too much leeway.''
Merrill has declined 29 percent this year in New York trading, giving the company a market value of $56.9 billion. Wachovia, based in Charlotte, North Carolina, has fallen 18 percent, valuing it at $92 billion.
Merrill was downgraded by four analysts Oct. 25 who said the value of the firm's subprime mortgage assets will probably erode further. Goldman Sachs Group Inc., UBS AG, Wachovia and Sanford C. Bernstein & Co. analysts cut their recommendations from the equivalent of buy to hold.
The firm may have to write down its holdings by $4 billion in the fourth quarter, on top of the $8.4 billion charge, according to CIBC World Markets. The company made 43 percent of revenue from global markets last year. The loss is O'Neal's biggest misstep since he became CEO in 2002. He has criticized acquisitions made under his predecessor, David Komansky, whose expansion culminated in a $1.7 billion charge in the fourth quarter of 2001, then a record in the firm's nine-decade history.
``As a board, you've got the responsibility to review his performance,'' said Glenn Henricksen, a former risk manager at Bear Stearns Cos. in Asia, and now a partner at CIF Consultants, which provides risk management and consulting services to financial institutions in Asia. ``If he's not really performing up to snuff, the board has the responsibility to replace him.''
The 11-member board includes O'Neal, Codina, CEO of Flagler Development Corp., and Judith Mayhew Jonas, former provost of Kings College at the University of Cambridge, England, who will all serve as directors until next year.
Merrill's other board members are Smith College President Carol Christ; Virgis Colbert, a senior adviser to the Miller Brewing Co.; Alberto Cribiore, who runs private equity firm Brera Capital Partners; Chubb Corp. CEO John D. Finnegan; former Securities & Exchange Commissioner Aulana L. Peters; former U.S. ambassador to China Joseph Prueher; former Clayton Dubilier & Rice Inc. executive Ann Reese, and Charles O. Rossotti, a senior adviser to private equity firm Carlyle Group.
Codina, Christ, Cribiore, Finnegan and Rossotti declined to comment. The other directors didn't return phone calls seeking comment yesterday.
O'Neal earned his way through college by spending alternate semesters working at a General Motors Corp. assembly plant in Georgia. He 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.
The world's largest financial institutions have written down more than $30 billion of mortgages, securities and corporate loans whose value fell during the third quarter. A surge in defaults on home loans to borrowers with poor credit histories has prompted more than 110 mortgage companies to close, file for bankruptcy or put themselves up for sale since the start of 2006.
Merrill bought First Franklin to capitalize on a five-year boom in underwriting asset-backed securities. The San Jose, California-based company was the 10th-biggest subprime lender in 2006, with $27.7 billion of loans, according to data compiled by industry publication Inside Mortgage Finance.
Slumping credit markets have led to the dismissal of industry executives including UBS CEO Peter Wuffli and Bear Stearns Co-President Warren Spector, and resulted in Lehman Brothers Holdings Inc., E*Trade Financial Corp. and Citigroup Inc. losing more than 20 percent of their stock market value.
The board of Credit Suisse Group decided not to renew co-CEO John Mack's contract in 2004 after he pushed for the bank to merge with a rival. A year later he replaced Philip Purcell, the most recent CEO of a major Wall Street investment bank to be ousted, at Morgan Stanley, the second-biggest firm after Goldman.
Fink, 54, a pioneer of the mortgage-backed bond market, founded BlackRock in 1988 with capital from private-equity firm Blackstone Group LP. PNC Financial Services Group Inc. bought the company for $240 million in 1995 and sold a stake to the public four years later.
Fink sold a 49.8 percent stake in BlackRock to Merrill in February last year in return for the bank's fund-management unit, creating a firm with $1 trillion of assets and access to Merrill's network of 16,600 financial advisers.
Thain, 52, took over as New York Stock Exchange chief in January 2004 after 25 years at Goldman, where he rose to become co-president with John Thornton. He led the NYSE's $14 billion acquisition of Paris-based Euronext in April, creating a market that processes about $127 billion of securities trades daily across seven different exchanges on both sides of the Atlantic.
Merrill, founded in 1914, has 64,200 employees and generates two thirds of its revenue in the U.S. Last year the company made about 55 percent of revenue from securities trading and investment banking, 35 percent from wealth management, and the rest from asset management. It is this year's top U.S. stock underwriter and the No. 6 mergers adviser, Bloomberg data show.
Merrill is a passive minority investor in Bloomberg LP, the parent of Bloomberg News.
Bloomberg
Stan O'Neal is facing pressure to abandon his post as chairman and chief executive officer of Merrill Lynch & Co. after misjudging the contraction in credit markets and posting the firm's biggest-ever quarterly loss.
Merrill's directors met last week to discuss his potential departure and may make a decision this weekend, the Wall Street Journal reported, citing people familiar with the matter. The New York Times said O'Neal discussed a possible merger with Wachovia Corp., angering his board. CNBC reported that he told friends he'll probably be out of a job this weekend.
Merrill surged the most in five years in New York trading Friday on speculation O'Neal, 56, will be ousted and the world's largest brokerage will become a takeover target. The bid to replace O'Neal is being led by board member Armando M. Codina, the Financial Times reported.
``His time is up,'' said James Cullen, president of Schafer Cullen Capital Management Inc., which oversees $10 billion including 1.2 million Merrill shares as of Sept. 30. ``You can see from the reaction in the stock that any change of management would be good.''
O'Neal lost the confidence of investors earlier last week after posting a $2.24 billion quarterly loss, the biggest in Merrill history and six times the amount the New York-based firm forecast just three weeks earlier. Deutsche Bank AG analyst Mike Mayo said in a report yesterday that Merrill might fetch $100 to $120 a share in a takeover.
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 on Oct. 24, after O'Neal said the firm misjudged the severity of the decline in debt markets since July.
Investors who lauded him for chasing higher returns as the biggest underwriter of securities backed by subprime loans now question his management.
O'Neal broached the possibility of a merger late last week in a call to Wachovia Chairman and CEO Ken Thompson without consulting Merrill directors, the Times said, citing people with knowledge of the matter. The board discussed possible candidates to replace O'Neal including BlackRock Inc. CEO Laurence Fink and NYSE Euronext CEO John Thain, the newspaper said.
Greg Fleming, Merrill's co-president, and Robert McCann, the head of the firm's retail brokerage, are also among the potential replacements and an arrangement in which they share power is a possibility, the Journal reported on its Web site yesterday.
``We don't comment on rumors,'' said Merrill spokeswoman Jessica Oppenheim. Fleming, 44, and McCann, 49, didn't return phone calls seeking comment.
Investors drove Merrill shares down 9.3 percent in the two days after the largest U.S. brokerage reported its loss. Under O'Neal's leadership, the firm acquired subprime mortgage lender First Franklin Corp. for $1.3 billion in December, just as the real-estate market peaked.
He announced an $8.4 billion writedown Oct. 24 on loans and bonds backed by mortgages, almost twice as large as the firm estimated 19 days earlier.
Credit-default swaps tied to Merrill Lynch's bonds fell 4 basis points yesterday to 83 basis points, according to broker Phoenix Partners Group in New York. The five-year contracts, used to speculate on the company's ability to repay its debt or hedge against the risk of default, decline as investor confidence improves.
``O'Neal is under fire,'' said Patrick Lemmens, who helps manage 2.5 billion euros ($3.6 billion) of financial stocks at ABN Amro Asset Management in Amsterdam and doesn't own Merrill shares. ``If Merrill were doing very well and he had done this, it would be probably no problem at all.''
Merrill board member Codina wants O'Neal to leave after he discussed a possible merger with Wachovia without prior approval from the board, the FT said, citing people familiar with the matter.
The board's reaction indicates that a merger isn't likely for the moment, though it may add to pressure to replace O'Neal, the Times said, citing unidentified people close to the firm. A merger of Wachovia, the fourth-biggest U.S. bank by market value, and Merrill, the third-biggest securities firm, probably would come under regulatory scrutiny, the newspaper reported.
``The idea that O'Neal's pushing for the sale of the company is the nail in the coffin,'' said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, and author of ``100 Years of Wall Street. ``It's another case of a Wall Street CEO who got away with too much after being given too much leeway.''
Merrill has declined 29 percent this year in New York trading, giving the company a market value of $56.9 billion. Wachovia, based in Charlotte, North Carolina, has fallen 18 percent, valuing it at $92 billion.
Merrill was downgraded by four analysts Oct. 25 who said the value of the firm's subprime mortgage assets will probably erode further. Goldman Sachs Group Inc., UBS AG, Wachovia and Sanford C. Bernstein & Co. analysts cut their recommendations from the equivalent of buy to hold.
The firm may have to write down its holdings by $4 billion in the fourth quarter, on top of the $8.4 billion charge, according to CIBC World Markets. The company made 43 percent of revenue from global markets last year. The loss is O'Neal's biggest misstep since he became CEO in 2002. He has criticized acquisitions made under his predecessor, David Komansky, whose expansion culminated in a $1.7 billion charge in the fourth quarter of 2001, then a record in the firm's nine-decade history.
``As a board, you've got the responsibility to review his performance,'' said Glenn Henricksen, a former risk manager at Bear Stearns Cos. in Asia, and now a partner at CIF Consultants, which provides risk management and consulting services to financial institutions in Asia. ``If he's not really performing up to snuff, the board has the responsibility to replace him.''
The 11-member board includes O'Neal, Codina, CEO of Flagler Development Corp., and Judith Mayhew Jonas, former provost of Kings College at the University of Cambridge, England, who will all serve as directors until next year.
Merrill's other board members are Smith College President Carol Christ; Virgis Colbert, a senior adviser to the Miller Brewing Co.; Alberto Cribiore, who runs private equity firm Brera Capital Partners; Chubb Corp. CEO John D. Finnegan; former Securities & Exchange Commissioner Aulana L. Peters; former U.S. ambassador to China Joseph Prueher; former Clayton Dubilier & Rice Inc. executive Ann Reese, and Charles O. Rossotti, a senior adviser to private equity firm Carlyle Group.
Codina, Christ, Cribiore, Finnegan and Rossotti declined to comment. The other directors didn't return phone calls seeking comment yesterday.
O'Neal earned his way through college by spending alternate semesters working at a General Motors Corp. assembly plant in Georgia. He 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.
The world's largest financial institutions have written down more than $30 billion of mortgages, securities and corporate loans whose value fell during the third quarter. A surge in defaults on home loans to borrowers with poor credit histories has prompted more than 110 mortgage companies to close, file for bankruptcy or put themselves up for sale since the start of 2006.
Merrill bought First Franklin to capitalize on a five-year boom in underwriting asset-backed securities. The San Jose, California-based company was the 10th-biggest subprime lender in 2006, with $27.7 billion of loans, according to data compiled by industry publication Inside Mortgage Finance.
Slumping credit markets have led to the dismissal of industry executives including UBS CEO Peter Wuffli and Bear Stearns Co-President Warren Spector, and resulted in Lehman Brothers Holdings Inc., E*Trade Financial Corp. and Citigroup Inc. losing more than 20 percent of their stock market value.
The board of Credit Suisse Group decided not to renew co-CEO John Mack's contract in 2004 after he pushed for the bank to merge with a rival. A year later he replaced Philip Purcell, the most recent CEO of a major Wall Street investment bank to be ousted, at Morgan Stanley, the second-biggest firm after Goldman.
Fink, 54, a pioneer of the mortgage-backed bond market, founded BlackRock in 1988 with capital from private-equity firm Blackstone Group LP. PNC Financial Services Group Inc. bought the company for $240 million in 1995 and sold a stake to the public four years later.
Fink sold a 49.8 percent stake in BlackRock to Merrill in February last year in return for the bank's fund-management unit, creating a firm with $1 trillion of assets and access to Merrill's network of 16,600 financial advisers.
Thain, 52, took over as New York Stock Exchange chief in January 2004 after 25 years at Goldman, where he rose to become co-president with John Thornton. He led the NYSE's $14 billion acquisition of Paris-based Euronext in April, creating a market that processes about $127 billion of securities trades daily across seven different exchanges on both sides of the Atlantic.
Merrill, founded in 1914, has 64,200 employees and generates two thirds of its revenue in the U.S. Last year the company made about 55 percent of revenue from securities trading and investment banking, 35 percent from wealth management, and the rest from asset management. It is this year's top U.S. stock underwriter and the No. 6 mergers adviser, Bloomberg data show.
Merrill is a passive minority investor in Bloomberg LP, the parent of Bloomberg News.
Bloomberg