Sometimes a CEO can end up getting ousted as a scapegoat for unavoidable problems or uncontrollable macroeconomic conditions. I would argue that this was not the case with Stan O'Neal at Merrill Lynch (NYSE: MER).
I don't know Stan personally, and I'm sure that he is a very bright guy. However, it appears that he attempted a gambit at Merrill that has not only left the company with poor financial results, it has also made some question whether the company will be able to continue as a going concern. He got greedy when others were greedy and completely failed to cover the firm's rear end.
The result is that today, with Merrill's stock around half its 52-week high, CEO John Thain is aggressively selling new equity to make sure the company's balance sheet has adequate liquidity. Thanks to the massive destruction of capital at the firm and the subsequent equity issuances, the company's pro forma book value per share was just slightly above $30 at the end of 2007. With the value of the company cut in half, it's hard to say that its stock is still dramatically undervalued.
But wait ...
Yet, when I look at the landscape of companies that have been beaten up in the recent turmoil, Merrill hardly strikes me as the worst of the worst. Citigroup (NYSE: C) has a great brand and a good banking franchise, but it still suffers from massive exposure to what could ultimately be bad paper. And that's not to mention that its businesses are just not all that exciting. Bear Stearns (NYSE: BSC), another company that's been whacked, hasn't really shown very impressive numbers across its business, and it's questionable whether the new CEO, Alan Schwartz, will come in with a heavy enough hand to change that.
When I look at Merrill, though, I see a company that -- beyond the carnage that mortgage and related paper has caused -- has a lot going for it. Despite severe drops in the demand for debt issuance over the past couple quarters, its investment banking unit posted decent results for the fourth quarter -- including a year over year doubling in revenue in its advisory services business. Equity markets were likewise strong, increasing 23% year-over-year and 37% over the prior quarter. And you can't forget the company's strong global wealth management franchise, which continues to produce solid, albeit unexciting, results.
A new sheriff in town
Add to that the fact that the company has brought in Thain, who has an impressive track record of helping to build successful businesses at Goldman Sachs (NYSE: GS) and NYSE Euronext (NYSE: NYX). Thus far, Thain has taken decisive action to help keep the firm solvent, which seems to be a pretty prudent first step. He is also putting significant focus on making sure the firm has adequate risk management in place -- late, yes, but better than never. The fact that both Temasek and Davis Selected Advisors, two savvy investors, have bet sizeable amounts is also a big vote of confidence for the firm.
Admittedly, Merrill is not out of the woods by any stretch. As it revealed in its quarterly report, it still has significant exposure in multiple areas that could lead to yet more writedowns. A U.S. recession certainly wouldn't do the firm any favors, either. With all of that taken into consideration, however, I think Merrill's stock is certainly one to watch closely -- even if it isn't one to buy right now.
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