November 1, 2007

Thain Is New CEO of Merrill Lynch

Merrill Lynch says it hired former NYSE Euronext CEO John Thain to replace the brokerage firm's ex-CEO and chairman, Stan O'Neal, who "retired" on October 30, six days after the firm announced a write-down of some $8 billion due to its mortgage-related holdings. That amount represents about one-eighth of Merrill's total value at the end of the third quarter.

"John will be adept at balancing the focus on risk management and controls while taking the steps necessary to ensure the company evolves and grows," says Alberto Cribiore, Merrill Lynch's interim non-executive chairman and chairman of the company's search committee. "He understands both the company's challenges, and as his track record shows, he appreciates the value associated with the Merrill global brand. We are delighted to welcome him aboard."

Thain, whose hiring was announced November 14, is set to begin work at Merrill on December 1. He joined the NYSE in January 2004, after serving as president and chief operating officer of Goldman Sachs Group since July 2003 and president and co-chief operating officer from May 1999 through June 2003. From 1994 to 1999, he occupied several different posts with Goldman.

Reports had circulated in early November that BlackRock CEO Larry Fink was being considered for the top post at Merrill.

"This is a big plus for the company, since Mr. Thain appears to have the necessary characteristics to solve the company's key problem, which is the risk-management business," says Richard Bove of Punk, Ziegel & Company in a note.

Bove adds, though, that Thain has a reputation of being "a cerebral and austere manager, similar to Mr. O'Neal. "This style of management does not work at Merrill as Mr. O'Neal discovered. This company is still, first and foremost, a retail sales organization with 16,000 sales people."

Merrill's mortgage-related write-down surpasses what the company had predicted, though it was "partially offset" by the results of global wealth management, or GWM, and other units, the company says. For the third quarter, the company had a pre-tax loss of $3.5 billion.

On and after October 26, the media focused on reports of O'Neal talking with Wachovia about a possible deal, which may have included the idea of a merger or takeover. This may have played a role in the board's discussions about and with O'Neal about leaving.

He reportedly received a severance package worth about $160 million. It's worth remembering that O'Neal reduced the cost of running the business at Merrill by $6 billion, re-oriented the firm, improved earnings and helped the company produce $7.5 billion in net profits in 2006, shares Bove.

"This was not a bad job," says the analyst. "The firm is stronger today than it was when he took over ..." Still, O'Neal failed at instituted the proper controls over some market activities and never developed the constituency necessary to maintain power, while firing some 26,000 people, adds Bove.

Who else was on the short list of possible O'Neal replacements? Bob McCann, head of the brokerage operations, as well as Merrill Co-President Gregory Fleming. .

O'Neal was chief executive officer since December 2002 and joined the company 21 years ago, the company says.

"Private client is 35 percent of the revenues of Merrill Lynch," McCann told Research in July. "We have relevance within our own company. In our very roots as a company, we've always been in the private-client business, and we always will be. It has significance as being both the biggest in the industry and being a significant part of our company.

"The advisors generating 81 percent of our [private-client] revenues have been with us an average of 11 years. And our top 25 producers have been with our company about 25 years on average," McCann shared. "So people build long careers here as advisors."

The firm says its advisor group expanded to more than 16,600 recently, by adding 410 FAs in the third quarter. GWM's third-quarter net revenues were $3.5 billion, up 29 percent from the third quarter of 2006, while pre-tax earnings rose 70 percent to $953 million. Global private client revenues increased 23 percent to $3.3 billion.

Total client assets in GWM accounts were $1.8 trillion, up 14 percent year over year. And the pretax profit margin was 26.9 percent, up from 20.4 percent in the year-ago period.

Unlike Fink and Thain, both outsiders, McCann has worked at Merrill for more than 20 years. He did leave Merrill for several months in 2003 to join AXA Financial, only to return at O'Neal's request.

"Merrill has historically always been run by its sales force," says Bove. "The change in this concept when Mr. O'Neal was put in as CEO may now be viewed as a mistake and the firm given back to the sales force.

O'Neal became CEO in December 2002 and was elected chairman in April 2003. He started at the company in 1986 as vice president of investment banking, after working at General Motors.

In a sharp contrast with the battle at Morgan Stanley to push out former CEO Philip Purcell, which was a protracted one, the move to oust O'Neal was "too strong, too fast," says Bove.

Purcell was forced out of his role as head of Morgan Stanley in June 2005, leaving with some $44 million in cash and a reported $200 million in salary and other pay received during his eight years at the firm. He retired after the exodus of many executives and other employees over a 15-month period, including five of Morgan Stanley's 14-member management committee. Some dissident shareholders and ex-Morgan staff had called for Purcell's firing. He was replaced by John Mack, who had been with Morgan Stanley for 30-plus years but supposedly left after disagreements with Purcell in 2001.

Merrill's 64,200 employees and executives have motivation to want change at the top. In the latest quarter, Merrill said it spent nearly $2 billion on compensation and employee benefits, down from $3.94 billion a year ago and $4.76 billion during the second quarter of 2007.

How much of a shift is in store at Merrill remains to be seen, cautions Bove, who believes that Merrill must change its "short-term orientation to issues."

"It is time for Merrill to refine its strategy and make it flexible enough to handle the normal cyclicality of its business. Hopefully, this is what a low-profile, detail-oriented CEO with a strong capital markets background will do."

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Reach Managing and Web Editor Janet Levaux at jlevaux@researchmag.com

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