The Merrill Makeover

Merrill Lynch's (NYSE: MER) new CEO has come out with guns blazing.

After a disastrous third quarter, in which the firm wrote down more than $8 billion, Merrill CEO Stan O'Neal was given the boot and the board brought in John Thain from NYSE Euronext (NYSE: NYX). A pair of announcements on Monday showed that Thain is not wasting any time trying to whip Merrill back into shape.

Merrill announced first that it is selling its commercial finance business to GE Capital, a unit of General Electric (NYSE: GE). Although the terms of the deal were not disclosed, Thain said the deal was continuing along the lines of "divesting non-core assets" and that it would free up $1.3 billion for other parts of the business.

The second announcement was a confirmation of rumors late last week that Temasek Holdings -- a Singapore government investment vehicle -- would give Merrill a significant capital infusion. The total announced transaction is a private placement of up to $6.2 billion in new Merrill shares. Temasek is purchasing $4.4 billion with the option to purchase another $600 million before the end of the first quarter of next year, and Davis Selected Advisors is buying another $1.2 billion.

Thain explained that the deal would have both financial and strategic benefits. The financial benefits are obvious -- by the time this transaction closes, the firm will have at least $5.6 billion in fresh capital to bolster its balance sheets. On the strategic side, Thain thinks the tie to Temasek could open doors overseas.

Infusing confidence
What's most interesting about the deal, though, is the ilk of these two investors. Per its website, Temasek has delivered compounded annual returns of more than 18% since its 1974 inception. The fund has a portfolio of more than $100 billion and isn't a newcomer to the financial services sector. As of March of this year, 38% of the portfolio was financial services, which included a 7% stake in ICICI Bank (NYSE: IBN) and a 5% stake in Bank of China. Davis Selected is no slouch either; the value-oriented fund family has a 35-year track record as a long-term-oriented investor with solid results. The confidence that the two funds are putting in Merrill should encourage the company's shareholders.

While nobody would have expected Merrill's stock to soar like First Marblehead's (NYSE: FMD) 66% Friday leap after the announced Goldman Sachs (NYSE: GS) investment, Merrill's stock actually fell almost 3% on Monday. The likely reason is that only rough terms of the deal have been revealed. While the Marblehead deal gave investors a clear picture of Goldman's 20% stake, the Merrill announcement simply stated that Temasek's stake -- whether $4.4 billion or the full $5 billion -- would stay below 10%. This leaves investors to wonder whether $5 billion might represent a 9.9% stake, which would value the company at only $50.5 billion, or, say, an 8% stake, which would be a much more attractive $62.5 billion valuation.

It will certainly be important for investors to find out the price at which Temasek and Davis are stepping up. More broadly, though, the moves that Merrill is making reflect a new CEO who is looking to quickly put the firm back on track. A full about-face could be difficult until we see a break in the credit-market ugliness, but the sale of the commercial finance segment and the capital infusion seem like good moves to ensure that Merrill makes it out the other side of the credit crunch.

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