Merrill’s perils are something to avoid
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Dear Mr. Berko:
I’ve been a customer with Merrill Lynch for a long time. My broker tells me he’s going to leave for another firm because Merrill is suffering from a management and credit crisis. He even thinks my stocks may not be safe and has asked me to join him when he leaves. I own a few shares of Merrill stock, and I wonder if I should continue to hold them. I know the brokers are not making as much money at Merrill as they have in the past few years, and that their business is way down. So is it safe to keep my stock portfolio at Merrill? What do you think is going on at that company?
F.R., Cleveland
Dear F.R.:
When John Thain took over the chairmanship of Merrill Lynch & Co. Inc. (MER-$34.54) last year, he was told by Stan O’Neil, the former chief executive officer, that MER needed billions of dollars to meet its regulatory obligations. O’Neil recommended that Thain sell MER’s interest in Bloomberg, BlackRock Inc. (BLK-$199.56) and Merrill Lynch Capital rather than raise money via the sale of new shares.
Well, Thain sold Merrill Lynch Capital for $1.5 billion, raised $2.5 billion with a new 8.625 percent preferred, sold $6.5 billion of newly minted common stock to several Asian investors and $1.5 billion of new stock to a California investor. This $12 billion won’t do the job, so Thain is now considering the sale of MER’s 52 million shares of BLK (worth about $10.5 billion) and its interest in Bloomberg, which may be worth $5 billion.
Last year, MER took cumulative losses of nearly $10 billion on its subprime mortgage securities, a $3 billion write-down from its hedge guarantees, plus another $2 billion on leverage loans, real estate and bank assets. And the blood continues to flow as the company wrote down another $9 billion of assets in the first quarter of 2008.
Many observers believe that there are more write-downs to come, which is why Thain is considering the sale of Bloomberg and BLK.
Last year, this poorly managed brokerage firm lost more than $10 a share; this year, Merrill could lose close to $5 per share, and no one really knows what the company will do in 2009. However, Morningstar, a respected and conservative research organization, thinks that MER will have to raise some $11 billion to $16 billion in new money this year.
Merrill Lynch is not, and I repeat NOT, in financial straits and should easily raise the capital it needs. I even put some of my money where my lips are and recently purchased MER’s 8.625 percent series 8 preferred, yielding 9.2 percent. However, Thain may reduce the work force by 8,000 to 10,000 jobs, close and consolidate some offices, put a tourniquet on salaries, eliminate year-end bonuses, etc.
Thain, an elegantly effete fellow not known for his warmth or communication skills, relates poorly to the retail side of Merrill’s business, which some say is beneath him. Others at MER resent the hiring of his Goldman Sachs cronies and New York Stock Exchange pals. Many department bosses with whom he must rub elbows in marketing, communications, research, compliance and retail sales have difficulty relating to Thain. Some of those department heads are seeking new employers.
Although you can be comfortable allowing Merrill to hold your securities, I don’t think you should be comfortable owning a company where the infighting and chaos resemble a presidential nominating convention. Back in early April when MER was trading at $46, I recommended its sale for similar reasons. I’m still comfortable with a sell recommendation.
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