What Merrill Needs in a New CEO

With Stan O'Neal out, the board must decide whether to steer the firm back to its brokerage roots or continue its push into trading

O'Neal's potential successors include John Thain, Laurence Fink, Robert McCann, and Gregory Fleming (pictured, left to right)

by Steve Rosenbush

Ousting Chief Executive Stanley O'Neal was a pretty quick decision for the board of Merrill Lynch (MER). Choosing a replacement may be a longer and more complex process.

On Oct. 30 the board made it official, saying O'Neal would retire (BusinessWeek.com, 10/30/07) as chairman and CEO, the fallout from a record $8.4 billion in writedowns for the third quarter and unauthorized merger talks with Wachovia (WB). The board named director Alberto Cribiore interim nonexecutive chairman and said Cribiore would lead a search for O'Neal's replacement.

The board's choice will say a lot about Merrill's future. Cribiore and the rest of the directors can either push the firm back toward its roots in the brokerage business or direct it toward new opportunities, such as the proprietary trading business O'Neal had encouraged. The ex-CEO had hoped to capture some of the profits that Goldman Sachs (GS) and Morgan Stanley (MS) have pulled in from trading, and while the strategy worked for years, it ultimately led to the recent billions in losses.

"The board needs to decide whether the business model was good and the company just needs better execution, or the business model itself needs to be changed," says Adam Compton, an analyst at RCM Capital Management, which handles $130 billion in assets and had 800,000 Merrill shares at the end of June. Cribiore didn't respond to a request for comment.

A Fork in the Road

The two extremes are represented by John Thain, the CEO of NYSE Euronext (NYX), and Robert McCann, Merrill's vice-chairman and president of its Global Private Client Segment. McCann, 49, oversees Merrill's 16,600 brokers, the largest such force in the U.S., and would signal a return to Merrill's roots. Choosing Thain, 52, a former top executive at Goldman Sachs, would signal a determination to move Merrill more toward the model followed by the Wall Street icon.

There are choices in between, both inside and outside Merrill. One top external candidate is Laurence Fink, 54, chief executive of BlackRock (BLK), an investment manager in which Merrill holds a stake. The leading internal candidate is Gregory Fleming, who's only 44. Despite his age, which is considered a slight negative, he has taken on additional responsibilities as co-president and now oversees the company's business units and risk management. "Merrill today also announced that the jobs of co-COO/presidents were more clearly delineated to give Greg Fleming seemingly more responsibility," says Mike Mayo, an analyst at Deutsche Bank (DB).

Fleming is a Yale-trained lawyer who is widely liked within the firm. He rose through the global markets and investment banking units and would bring a broad set of skills. The firm's other co-president, Ahmass Fakahany, 48, runs finance, human resources, and global support, and is not considered a candidate.

Cribiore and the board set no timetable. But investors are clearly getting antsy. The stock closed Tuesday at 66.56, down 1.86, or 2.76%, for the day. Investors such as Compton say they would have preferred to see Merrill name a successor at the same time it announced O'Neal's resignation.