A very loyal reader writes:
Why did O’Neal defenestrate while Cayne at Bear and Prince at Citi
have managed to hang on to their jobs? Is a takeover of Merrill realistic,
considering the handicaps of the few firms big enough to do it? Is Merrill
stock fairly priced?
Let’s take those questions in order.
O’Neal’s gone because he had no support: that’s the long and short of it. He
was good at making himself unsackable, both by posting very impressive financial
results and also by more political means: firing anybody who got too powerful,
stocking the board with allies. But Merrill Lynch is a firm of brokers, and
O’Neal was never a broker, which meant that he could never count on any support
within the firm. Indeed, fingers
are pointing at Merrill broker Bob McCann as the man who orchestrated the
to the NYT which triggered O’Neals departure.
Without the support of his employees or executives, O’Neal was forced to rely
on his board. But that’s where the leak was so smart: it revealed O’Neal’s cavalier
attitude not only towards his lieutenants (board members are often OK with that)
but also towards the board itself. And that’s something boards find much harder
to stomach. When O’Neal couldn’t convincingly explain why Merrill’s losses were
so big or whether there was any chance of them recurring, the reasons for continuing
to pay him his large eight-figure salary diminished to zero. Not only did he
have no support within the company, he also seemingly had no control over it,
Niether Cayne nor Prince is quite as lonely, in this respect, as O’Neal was.
While O’Neal was an outsider to Merrill culture, Cayne is Bear Stearns.
And Prince, for the time being at least, retains the support of key lieutenants,
chief among them Bob Rubin. But neither is exactly immune from defenestration.
Is a takeover of Merrill realistic? I’d say it depends largely on the
new CEO. An insider, like Fleming or McCann, will be much less likely to
sell than an outsider like Thain or Fink. And I can promise that there won’t
be any hostile approaches: if Merrill is sold, it will be sold because that’s
what the new CEO thinks will be best for the firm and its shareholders.
The who-might-buy-Merrill question
is tougher: it would take serious cojones for any banker to attempt
a merger of this magnitude in the context of a potentially massive credit crunch.
Such a deal would, however, be transformative for anybody who did it, which
means that there’s possibly a handful of banks who might try. Merrill’s US retail
presence is unrivalled, and I can imagine that a few big European banks would
love it: they are probably more likely suitors than a US shop like JPMorgan
Chase or Wachovia.
As for the price of Merrill stock, it’s now trading at about $66, which puts
it on a price-to-book ratio of about 1.5. But it’s entirely possible that Merrill
assets including its 20% stake in Bloomberg are worth rather more than the official
book value lets on. Reports
An influential banks analyst, Mike Mayo of Deutsche Bank, estimates that
Merrill is even cheaper when you factor in other assets not fully reflected
on the balance sheet. He reckons Merrill trades at 0.7 times his adjusted
book value. If potential buyers share Mayo’s view, they could swoop in soon.
For the time being, the most likely scenario by far is that Merrill remains
independent. As an independent bank, is it worth $66 a share? That depends entirely
on your view of the markets and the economy going forward. There’s no real reason
to believe that Merrill has completely cleansed the Aegean stables of its balance
sheet, and if credit markets continue to get worse, it might be a while before
Merrill reverts to the kind of profits it has historically made. What’s more,
there’s a very serious risk that credit markets might eventually drag equity
markets down with them, which would have a nasty effect on Merrill’s bread and
butter brokerage operation.
So I’d say that there’s a significant downside risk to buying the stock at
this level, which probably more than counteracts the upside risk of a takeover
bid. On the other hand, if neither of those two things happen, the stock could
muddle along quite happily where it is.
To put it another way, the stock might go up, or it might go down, or it might
go sideways. You’re welcome.
Cimilluca notes that Merrill’s Greg Fleming lives to do M&A deals in
the banking sector. If the board wants Merrill to remain independent, they might
want to choose McCann.