There may be peril in the stock of Merrill
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I bought 400 shares of Merrill Lynch at $88 last July, and now it’s $53.75. What do you think of Merrill now that John Thain is taking over the company? Do you think it would be a good idea to average down my costs and purchase 400 more shares? My son, who has been a Merrill employee for the past 16 years, tells me that there are a lot of “nervous Nellies” in the home office, because it’s rumored that Thain wants to clean house. As you say, when there’s blood in the street, it’s time to buy.
E.B., Bend, Ore.
Dear E.B.:
A friend of Richard Grasso (former head of the New York Stock Exchange) told me the NYSE couldn’t wait to get rid of John Thain, who is also an active member of the Trilateral Commission. Thain is a brilliant technocrat who is more comfortable romancing computers than visiting with people. He learned to read income statements and balance sheets before he could talk and was designing organizational charts before he could walk.
Thain is leaving the Big Board with kudos. But his departure is also a relief to some insiders, who tell me he lacks people skills.
Merrill’s first choice for the top spot was Larry Fink, the CEO of BlackRock Inc. But Fink declined because Merrill was reluctant to disclose its entire subprime exposure.
Merrill is getting a technocrat as its CEO, a man who eschews friendships and may be anathema to Merrill’s sales force. Former CEO Stan O’Neal was not well-liked by the sales force, and Thain may be even less well-liked. Thain assumed his new duties Dec. 1, and there are rumblings that Merrill may lose some of its top executives in 2008. If that wasn’t bad enough, Thain, with no retail sales experience, may also lose some top salespeople who are roiling at his appointment.
This is a bad time to buy Merrill Lynch & Co. Inc. (MER-$53.75), the price of which is down from a 12-month high of $98. MER’s earnings could be in big trouble if the current problems in the mortgage and housing markets begin to affect the economy and contaminate the financial markets. Meanwhile, members of the company’s risk management team are yowling like cats in a spin dryer, and there are serious doubts concerning MER’s proprietary trading and investing schemes.
Merrill’s entry into the private equity business has created a deep divide between the firm’s investment banking business and its own investment concerns. There’s also significant concern about the company’s real exposure to the subprime mortgage fiasco; Some insiders believe that the final numbers could be significantly higher than the reported losses.
Some Merrill observers are concerned that Thain, whose focus is on international investing, will move assets and support from its U.S. retail business to its European, Mideast and Pacific Rim divisions.
I believe that MER will snap back, but I’m concerned that it may be a slow snap. I’m concerned that Thain’s ascension to the top spot might have a rocky beginning and possibly a stumbling tenure. I’m concerned that there may be some major defections, because some important MER players hold Thain in low esteem. I’m concerned that Thain, to whom a retail sales force is a pain in the butt, may treat this division with benign neglect. And finally, I’m concerned that MER’s collateralized debt obligation and subprime exposure may not have been fully disclosed as of yet.
I’d be concerned for you if you were to purchase 400 shares of the stock. If you must purchase MER, I recommend that you buy 200 shares today and wait six months to purchase the remaining 200 shares – possibly at a much lower price.
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