By
Alex Dumortier, CFA
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June 30, 2008
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It's different this time -- I promise. On Friday, Financial Times reported that Merrill Lynch (NYSE: MER ) will create a senior executive role responsible for all European businesses in a move that would mimic Goldman Sachs' (NYSE: GS ) hierarchy. You'll recall that Merrill's former CEO, Stan O'Neal, envious of Goldman's profitability, rushed headlong to take more risk with the firm's capital. The rest -- nearly $18 billion in writedowns -- is history (in the making).
The fall of the copycats
Let's be fair to Merrill: Morgan Stanley (NYSE: MS ) , Lehman Brothers (NYSE: LEH ) , and Citigroup (NYSE: C ) all sought to imitate Goldman's success with unfortunate results.
Why will it work this time? John Thain, who replaced O'Neal in December, is the first outsider to lead Merrill in the firm's history. And how could he not legitimately seek to imitate Goldman? Prior to joining Merrill, he spent his entire banking career there, eventually becoming president and chief operating officer.
Creating a leadership role on a geographical basis is meant to promote an integrated approach to the different businesses by breaking down barriers between M&A, capital markets, and wealth management -- one of the hallmarks of Goldman's approach to business.
Now's not the time to bet against Merrill
Thain is rebuilding Merrill into an organization in which the employees' interests are better aligned with those of the firm (this is something that Goldman does remarkably well). I wouldn't bet against him; he has a deep understanding of the industry and has already demonstrated his management aptitude by turning the New York Stock Exchange around (now NYSE Euronext (NYSE: NYX ) ). Despite the fact that analysts recently raised their loss estimates for Merrill's third quarter, Thain must be hoping that his efforts will, in due time, close the gap between Goldman's share price multiple (1.7 times book value) and Merrill's (1.4 times book value).
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