We all know what a lousy third-quarter Merrill Lynch had — it reported the worst loss in its 93-year history (a $2.3 billion net loss along with a staggering $8.4 billion in bond write-downs). As a result, CEO Stan O'Neal was forced into retirement. Was that fair? Richard Bove, the outspoken securities analyst at Punk Ziegel & Company, says O'Neal was scapegoated. “Pin The Tail on O'Neal, blame him for all of the company's current problems and kick him out,” Bove wrote derisively in an October research report (titled, “Merrill Lynch Makes Another Bad Decision — Part 3”). Bove believes Merrill is a better firm because of O'Neal's strategies. Read on to find out why.
Registered Rep.: You told us that you thought O'Neal should be fired as CEO, but kept at Merrill in some capacity. Can you explain that? I mean, Merrill suffered a pretty big hiccup.
RICHARD BOVE: When Stan O'Neal took over Merrill in 2001, the company had a $1.3 billion loss in the fourth quarter, which, on a relative basis, might have been as big as the one in the third quarter this year. As a result of the things that Stan O'Neal did, the company's earnings have almost increased tenfold from what Merrill earned in 2001 to 2006. In addition, in 2006 the company's earnings were almost double the highest level of earnings the company had ever hit, and that occurred in 2000. So it's clear that despite the fact that he has made some fairly significant errors in managing certain portions of the company, he's also restructured the company in a fashion that makes it a much stronger entity.
RR: What went wrong?
BOVE: I don't know. But the error that Merrill makes constantly, which I like to call the “Merrill Disease,” is that it tends to become highly involved in fads — no matter what the fad is. And we can take this back to 1989, 1990, where it became enthralled with junk bonds, then decided it hated them; where it got involved with Latin America, and then decided it hated that. You can take it through the late part of the 1990s when it was heavily involved in the scandals around investment banking and research.
RR: Where should Merrill be going?
BOVE: I think O'Neal has put it exactly on the right track. I think that all of the steps that he's made in the five years since he's been at the head of this company — from a strategic standpoint — are correct. In other words, he took the company overseas, which was absolutely critical because that's where most of the business is. He built its capital markets expertise, increased its trading capability. All of these things were the right things to do. And, at the same time, he attempted to maintain its position as the number one retail seller of securities and other financial products in the United States. So I think from the standpoint of strategic direction, he simply didn't do anything wrong.
RR: What about the Wachovia bid?
BOVE: It was a vicious rumor put into The New York Times by someone who wanted to oust Stan O'Neal. The only one who ever heard it was the guy who created the rumor and The New York Times. Everyone else refers to The New York Times article, but no one else has any basis to say that Merrill Lynch ever attempted to merge with Wachovia. Anybody who wasted their time calling Wachovia would find out that the story was totally false. [The NYT stands by its story, telling Registered Rep. the unnamed source was “reliable.”]
RR: It does seem rather crazy.
BOVE: Well, if people understood how large Merrill Lynch is, that it has over $1 trillion in assets, and that it has probably over 30,000 people working for it, they would understand that there was never any probability whatsoever of Merrill Lynch merging with Wachovia. Certainly a bank that is roughly a third smaller than Merrill Lynch is not going to buy Merrill Lynch.
There are only three banks in the United States that have the size to buy Merrill Lynch: Bank of America, Citigroup and JP Morgan. Bank of America and Citigroup clearly are not going to do it at the present time given their issues. And JP Morgan would devastate its earnings and ruin its stock price if it did, so it's not likely to. And there's no foreign entity that I think will step up and buy it, because if a foreign entity owns Merrill Lynch, Merrill Lynch runs the risk of losing a third of its customers.
RR: So, you are a buyer of Merrill stock?
BOVE: I'm a seller.
RR: If you're a financial advisor at Merrill Lynch, what's the impact on you? I guess you're just a little embarrassed.
BOVE: I don't think there's any impact. I think Merrill Lynch is certainly one of the finest investment banking/brokerage companies in the world, and I don't think that's changed. I think that if you get beyond the hyperbole and the desire to paint this guy O'Neal as a devil, you realize that he actually has meaningfully strengthened this firm, and that Merrill Lynch is better able to compete today over the long period than it's ever been. So I don't think there's any reason whatsoever to feel embarrassed about working for Merrill Lynch, because it's still, in my view, one of the best places anybody can work in this industry if you're a retail representative.
