| BUSINESSWEEK ONLINE : NOVEMBER 15, 1999 ISSUE | ||||||||
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| COVER STORY
'The Winds of Change Are upon Us' David H. Komansky is an unlikely chief executive to be leading Merrill Lynch & Co. into the Internet Age. Like past Merrill CEOs, Komansky began his career as a broker. That may be what gives him the human touch that remains central to Merrill's culture. Komansky credits his ability to get along with people to his upbringing in the Bronx as the son of a Jewish father and a Catholic mother. An avid Yankees fan, he still keeps a picture of the apartment building he grew up in next to his desk to remind himself of his humble origins. Certainly, no one describes Komansky, 60, as a techie: He admits he doesn't share people's fascination with the Internet. He talked with Senior Writer Leah Nathans Spiro about his vision for using the Internet to leverage Merrill's human talent. Note: This is an extended, online-only version of the interview that appears in the November 15, 1999, issue of Business Week. Q: Do you think the radical changes in the equity market are good for you, or that it means lower margins? A: It all depends. I think if we can stay in front of the curve, clearly there is going to be the opportunity to use it to our advantage. If on the other hand, we were to sit back and let all the change occur around us, then we'll have a problem. We have no intention of sitting back and letting it happen. Q: Right now you're a top player in the equity markets. Do you think you can keep that dominance? A: Oh yes, I think so. Particularly as you look at it on a global basis. Here in the U.S., it could get fractured somewhat. But we don't have a clear view on where the endgame is. That's why we're investing in ECNs [electronic communications networks, as alternative exchanges are called]. Q: How do you see the stock market changing? A: With very liquid stocks, there's no reason for human intervention, and I think you'll see that segue into an electronic-order-driven environment. However, the vast majority of stocks call for real market-making and capital commitment. There I think a specialist system could survive. Q: Are you really trying to transform the whole company into an Internet-based company? A: I don't look at it that way. The world is changing rapidly. We have to be in front of that change as quickly as we can. The Internet is the most significant enabling vehicle, creature, whatever you want to call it that's been introduced in my lifetime. We want to take the capabilities of Web technology and use it wherever we can to improve our business life. I happen to be a very, very strong believer that the winning model is going to leverage the best people and the best technology. I think technology will become ubiquitous. I think content eventually will be the battleground. I don't think there is a virtual player in the marketplace that can compete with our content. Q: You're talking about the retail and the institutional side? A: Yes. I believe that we are creating a full range of choice that will be very hard for anybody to match. It starts with the traditional relationship based on the financial consultant. People can approach us through a fee-based relationship, through the virtual environment, through the phone. So I think it's about convenience, choice, investor freedom. We're not imposing anything on anybody. I still think the adviser is the key to it. I think it's very difficult for people with significant investment needs to be able to do it by reading four-day old research. Q: Do you think you're going to lose many brokers, Dave? A: I think we're bound to lose some. I don't think it will be a lot. I think we've put one of the best weapons in the industry in the hands of the financial consultant, our Unlimited Advantage account. I think once they learn to leverage that account to capture new accounts, new assets, I think they'll find that the package of offerings is very, very attractive. Q: How much will all of these initiatives cost? A: The advertising costs clearly will increase. The online companies don't worry too much about making money. That's a market-cap game. We obviously are not going to spend money at that level, but we will spend more than we have in the past. It's not going to be crazy. Q: Will your technology costs increase? A: Marginally. It's not going to be a big blip from the levels that we were spending, mostly because a lot of the money that we would direct to Y2K we'll be able to use. Frankly, I think the challenge is much more the execution. Q: Do you ever worry that you're trying to do so many things at one time? A: That's the history of this firm. It has never really been very different. I remember sitting through interviews in the '90s and people looked at me like I was nuts about building this offshore footprint. Where would we be today if we hadn't done that? If you want to grow these businesses, it's not easy. Think of the fixed income business. Where we made all of our money in 1993, you can't make a nickel today. That whole end of it is commoditized. We're still making a ton of money in the business -- because we built the businesses, we have new products. That's just the nature of this business. Q: Do you see the Internet as a major threat to your margins? A: One of the quandaries of the Internet is that it does appear to be very difficult to figure out how to make a profit. It is very much an empowerment of the consumer and gives the consumer the ability to shop and purchase on a basis that leads to somewhat lower profitability. Nevertheless, I think the other side of the coin is that if you figure out how to take advantage of it, it can enhance profitability. We can deliver a much better product or service for the client by using it appropriately. Many of the vendors in the e-commerce sector are market-cap-driven companies where they don't have to worry about profitability today. I think that'll change. I think investors in some point in time will say, "where's the beef?" Q: What are you trying to do on the retail side with your e-commerce? A: We're trying to build relationships. We're trying to attract clients, to capture as many of their assets and as many of their commercial transactions as possible. Not necessarily to earn a profit on these. We're trying to create a financial portal, and you have to have things that'll attract them. When somebody wants to go to Amazon.com or any other portal, we are competing. Now the secret to this for us, is we have a payment system which is fairly unique, the CMA, and our Visa card. We are providing ultracompetitive prices to our clients, and we're doing it to bond them to the environment. Q: By getting into e-commerce, are you were going too far afield from just providing financial services? A: If we were selling books or we were selling flowers, that's going too far afield. Q: But you are selling books and flowers. A: Not really. If you think about it, clients come into our portal, our Web site. They hit Barnes & Noble, it defaults into the Barnes & Noble system. Barnes & Noble sells them the books, delivers the books, etc., as does every vendor. We're providing opportunities for our clients to fulfill their commercial needs through our Web site and providing the payment system for it. Q: So you really are competing with Amazon? A: We do stocks and bonds. But yeah, I guess you could look at it that way. Q: Do you have any regrets about not pushing a button on online trading sooner? If you had done this in 1995, 1996, offered online trading, just think what your market cap would be. A: No, I never thought we were ready for it. If you are a small company, you have a lot more flexibility in doing that then if you have 14,000 sales people, 600 physical locations, 8 million, 9 million clients. By the way, our financial consultants happen to be the best and most profitable in the world at what they are doing. I think our shareholders might have taken umbrage if we had blown that up. I think it took a great degree of thought and a hell of a lot of creativity for Launny [Vice-Chairman John L. Steffens] to come up with this approach that he took. We could have put up an online trading business obviously a long time ago. We don't want to be in online trading. We want online trading to be part of a complete market offering. Would I like to have others' market cap? Sure. Would I like to have their multiples? Sure. But I think they might like to be Merrill Lynch. It's really apples and oranges. I certainly would have preferred to have avoided what I consider the punishment that the market has put on our multiple because of appearance of a lack of enlightenment. Q: Do you deserve the reputation as Luddites? A: No, I don't think so. As a matter of fact, as an aside, this is the first interview I've done about this at all because I think we're just now in a position where we have to let our accomplishments show. I don't want to build expectations to the point that we can't deliver on them. Q: You're saying Merrill Lynch really is cool? A: I used to use the word cool when I was in college. Then all of a sudden it disappeared. Now all of a sudden it's cool to be cool. We jumped over hip. Q: Do you use the computer much at all? A: Oh yes. I'd say up until about three years ago, I was scared to death of that. I never touched it. And a couple of the people here talked me into putting one into my home. My kids already had it. But I studiously avoided it. Now, I use it constantly here in the office. At home, I use it quite a bit, mostly with my accounts and my own financial situations. My passion is collecting wine, and there are ways to enjoy that on the Internet. My wife is on there constantly with the family. I haven't figured out how to do it without it burning my eyes yet. I'm good for about 20 minutes at a time. Then I'm bleary-eyed with it, but I use it a lot. I will tell you this, I don't see the fascination that people like my daughter have with it. I had a long conversation with her before she went away to school. I'd just come back from Barnes & Noble. I had gone there on Saturday morning, to walk around. I'm an impulse buyer. I like to BS with people and see what's going on, what people are reading. I ask my daughter, why buy books online? She says to me, to save time. What are you worried about saving time? The kid sleeps till 2 in the afternoon! Why is she worried about saving time? I truly don't understand people's fascination with it. But it's there. It's real. It's gotta be addressed. Q: Do you feel that you have dropped the ball in the marketing area? A: No, because we didn't have anything to market. We didn't have the online capacity. I think you'll see a very interesting kind of advertising campaign unfold in January, and it has not gone unnoticed by me, some of the tactics that have been used against us. Q: Are you going to go negative? A: No. We're not going to go negative. There are many, many elegant ways to use people's words as a foil. We intend to aggressively advertise what our capabilities are. Q: Any numbers in terms of your spending? A: I can't do that. We're going to be more aggressive in attitude and in the way we advertise than we have in the past. And I think we've been probably a little too gentlemanly about it. Q: In talking to people here, I feel a sense of a religious conversion. How did that whole transition occur? What was the big trigger? A: I think what you see in this place today is a result of several years of effort by a lot of people. I personally feel that Launny was the fulcrum of change. I think Herb [former President Herbert M. Allison] brought an intensity and focus to it that was measurable. So the point I'm trying to make is that it has permeated the management levels to the point where they don't sit around complaining about it, talking about it. They are doing something about it. Q: What about Schwab surpassing your market cap? A: That was one of the events. It didn't make me feel warm and fuzzy. We've had a lot of people providing us with inputs, stimulation, motivation. We had [IBM Chairman] Lou Gerstner down here as a guest speaker. We've had John Chambers from Cisco. You know our people here, and they are not dumb. They know the winds of change are upon us. Q: You're saying that it has been a process? A: Yes. It's a culmination of a lot of events, many of them planned and orchestrated, and some of them just happened. But this is the beginning of the story, and now we have to make it all work. A year from now, two years from now, we'll see what we really accomplished. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 RELATED ITEMS Merrill's E-Battle COVER IMAGE: Inside Merrill TABLE: Merrill's Online Strategy...Has Many Pitfalls TABLE: Leaping into Cyberspace TABLE: Merrill's Web Presence TABLE: Merrill Towers over Schwab... CHART: ...But Schwab's Market Cap Tops Merrill's...And Schwab's Asset Growth Blows Merrill Away TABLE: A Slew of Partners The Architect of Merrill's Digital Future VIDEO: Q&A with John McKinley ``The Winds of Change Are upon Us'' (extended) ONLINE ORIGINAL: Online Brokerage Stocks: Is Their Time Coming Again? INTERACT E-Mail to Business Week Online | |||
