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
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.
Mum's the Word
Cribiore, 60, is a somewhat unusual choice to lead the search. A native of Milan, he was brought onto the board by O'Neal in 2003. He is founder and managing director of private equity firm Brera Capital and a former co-president at Clayton, Dubilier & Rice.
The board isn't saying anything at this point about which strategic direction they're inclined to take. Compton says that given the third-quarter losses, the prospect of changing the firm's business model "probably seems a lot better now than it did a few days ago."
If the directors believe Merrill can succeed in remaking itself along the lines of Goldman or Morgan Stanley, Thain would be a logical choice. He has transformed the NYSE into an exchange for the global digital market, mostly with the acquisition of rival Euronext. He also served as Goldman's president and chief operating officer for five years, from 1999 to 2004. Whether Merrill's board could persuade Thain to take the job is another matter.
Thain would be a departure from Merrill tradition in several important ways. In its 93-year history, Merrill has never gone outside the firm to fill the top job. And recent CEOs have come through the sales-and-brokerage business. O'Neal was known primarily for running the private client group and the corporate and institutional client group. Daniel Tully, a former stockbroker, ran Merrill from 1992 to 1996. He was succeeded by David Komansky, also a former broker, who ran Merrill until O'Neal took over in 2002.
A Platinum Parachute
Tradition is a powerful force at Merrill, where former CEOs are still a presence. Tully maintains an office at a Merrill facility in Stamford, Conn. Komansky keeps an office at a Merrill office in Midtown Manhattan. Neither man returned phone calls. Former CEO William Schreyer, CEO during the '80s, still has an office at Merrill's huge facility in Princeton, N.J. He declined to comment.
If Merrill seeks a more conservative course, BlackRock's Fink would be a logical choice. He's technically an outsider, but Merrill acquired 49% of BlackRock while O'Neal was CEO, a move that is considered a success. Fink, a veteran of First Boston's bond department, is regarded as an expert in risk management. He could be an ideal candidate if Merrill decides its future will remain strongly tied to trading, particularly in fixed-income instruments.
The drama at Merrill will not end with O'Neal's departure. Immediately after the news was released on Oct. 30, outsiders began to question the amount of money he'll take with him. The former chief won't get a severance package, but he will get $161 million in stock, options, and retirement benefits. "In our view there needs to be a better link between shareholders and the incentives of management," says Deutsche Bank's Mayo.
That's one more task for Merrill's board of directors as it searches for O'Neal's successor.