) The New York attorney general has forced the firm to cough up a $100 million fine to settle embarrassing charges that its analysts talked up dubious companies to help win investment-banking business. Days before that announcement, Merrill suffered a credit-rating cut, while major British clients continued to yank money out of its asset-management arm. Meantime, earnings and revenues are falling as the world's largest brokerage firm struggles to cope with a down market well into its third year.
As Merrill begins the long climb out of its hole, one executive it's counting on is a butcher's son and former Liverpool rugby player named Paul Roy. Last October, President E. Stanley O'Neal, heir apparent to Chairman David H. Komansky, tapped Roy as his key international executive, naming him co-president of global markets and investment banking. London-based Roy and Arshad R. Zakaria, Roy's co-chief in New York, are trying to turn around units that bring in 45% of Merrill's revenue. O'Neal is depending on Roy to put to work his considerable skills at risking capital and schmoozing clients to win new business, while Zakaria, a numbers man, focuses on trimming costs.
Roy, one of the few top Merrill execs with international credentials, faces a host of daunting challenges. The worldwide securities slump has clobbered many business lines, including mergers and acquisitions and initial public offerings, and Merrill now encounters far more competition in key underwriting businesses from banking behemoths such as Citigroup and J.P. Morgan Chase & Co. Pretax operating earnings for Roy's division plummeted 37% last year, to $2.4 billion on $9.989 billion in revenues. In the first quarter, pretax earnings fell 38% year-on-year. Roy has already overseen a brutal hacking of the global-equities division: Its head count was reduced to 12,600, from its 15,300 peak in 2000. "We are rationalizing the group and making it more productive," Roy says. Raising the revenue produced by each banker is central to his strategy, as is investing in businesses--such as foreign exchange and trading for institutions--that could be big profit centers.
Roy, 55, will need all the survival skills he learned growing up in a blue-collar household in London. He comes well-equipped for the task: His personal warmth and common touch inspire great loyalty in what can be a cold business. And one consequence of his just-another-bloke background is that he doesn't carry around an investment-banker-size ego. "Paul will just get on with it and do his best," says David Mayhew, chairman of Cazenove & Co., a Merrill competitor in the London brokerage market. "He doesn't treat himself in the serious way that some people do."
Indeed, to hear Roy tell it, his more than two decades in the market have been full of laughs and hijinks. On his very first day at work in the City of London, Roy dodged a bullet at a small brokerage outfit called Morton Bros. Told to mind a ledger book while a venerable clerk went to lunch, he mixed up the buy and sell sides. "I felt a bit like Rowan Atkinson," he says, referring to the buffoonish British comic.
Roy survived and became a successful rainmaker, signing up U.S. fund managers such as Fidelity Investments and TIAA-CREF to do their foreign investing through his firms. Later, at Smith New Court PLC, then one of London's biggest banks, Roy and longtime pal Michael J.P. Marks scooped more-established rivals by scouring the City for big blocks of stock to sell in high-risk trades. His most eye-catching deal: rounding up about 3% of Imperial Chemical Industries PLC, the British chemical giant, for corporate raider Lord Hanson in 1991. "We went and sold it to him as a naked short"--without any hedge, Roy says. "You would not dream of doing that today."
But soon Roy, who rose to CEO of Smith New Court, and Marks, who was chairman, could see a new global financial game taking shape, and they knew Smith New Court would not have the capital to play. In 1995, they sold the firm to Merrill for $803 million and went to work for the New York giant. Merrill was looking for a foothold in Europe: Smith New Court became the heart of its overseas platform. Jerome P. Kenney, a Merrill executive vice-president who helped negotiate the deal and then meld the two businesses, recalls Roy as being canny enough to quickly pick people for jobs while keeping the loyalty of those who were passed over. "He is a very good decision-maker," Kenney says, "but he keeps the personal touch."
While Marks became Merrill's Europe chairman, Roy initially ran the European-equity business, which he fashioned into a market leader. Promoted to head of global equities in 1998, he led Merrill to the top spot in the global league tables in equity-linked issues and in underwriting equity in 2001, raising $61 billion for clients. This year Merrill is second in equity and equity-related issues and fifth in worldwide M&A, according to Thomson Financial.
Now that he is the head of M&A as well as equities and fixed income, Roy wants his bankers working with each other to squeeze new business out of each client. "Bankers don't go hunting alone anymore," he says, reverently displaying a thick, spiral-bound book that details every point of contact between Merrill and a major client. "They go in as a team. If you have a great equity relationship with someone, why shouldn't you have a great debt relationship?"
Not everyone is a fan. One former associate points out that while Roy may know his stocks, he has "no experience whatsoever in investment banking." Roy's promotion to investment banking chief shows how little executive talent Merrill has, this person says.
Roy laughs off such comments. He says it might not be a bad thing to put someone in the job who doesn't have an investment-banking background. "I don't think you can do this job without a strong trading and risk background," he says. "A lot of it is about committing capital. It is absolutely critical to have that skill set." For example, Roy recently signed off on a complex Merrill-designed stock-and-derivative deal for two Italian foundations that allowed them to smoothly dispose of about $1 billion in UniCredito shares.
Roy is also unfazed by the scandal concerning the conduct of Merrill's analysts, saying the institutional clients he talks to "don't see this as a Merrill issue but as an industry issue. I certainly don't think there has been any impact on business." In any case, the research side of the firm falls outside his purview, as does the troubled asset-management operation.
Roy, meanwhile, has big plans for his own units. He wants, for instance, to use Merrill's strength in debt issues to beef up other trading and to boost Merrill's foreign-exchange business. He just hired 20 foreign-exchange professionals. "I am an expansionist by nature," he says. "We are building businesses at Merrill Lynch even when markets are darkest." An optimist like Roy may be just what Merrill needs. By Stanley Reed in London, with Emily Thornton in New York