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O’Neal Gone: Reps Apathetic, Analysts Say Get Back To Basics

Stan O’Neal was allowed to retire it was announced today, after 21 years at the company, the last five as CEO. Alberto Cribiore, a member of the board and founder of Brera Capital, a global private equity firm, was named interim non-executive chairman. Cribiore will also lead the search for O’Neal’s replacement.

Stan O’Neal was allowed to retire it was announced today, after 21 years at the company, the last five as CEO. Alberto Cribiore, a member of the board and founder of Brera Capital, a global private equity firm, was named interim non-executive chairman. Cribiore will also lead the search for O’Neal’s replacement.

So, what does the boardroom upheaval mean to you, the Merrill financial consultant? Perhaps not much, particularly if the popular Bob McCann succeeds Stan O’Neal. After all, you guys rock. The Global Wealth Management division, which included Global Private Client (that’s the retail brokerage) and Global Investment Management, reported healthy earnings in the third quarter: $953 million in pre-tax profits, up 70 percent from a year ago—on $3.5 billion in net revenues; $26 million in new assets were gathered in the period—better than everyone except Schwab, which brought in $37 billion in the quarter. Morgan Stanley brought in $15 billion and Smith Barney gathered $8 billion. And remember: Of the $3.4 billion the Globabl Wealth Management division grossed in the third-quarter, $3.3 billion of that was contributed by the retail private client unit. That would be you, the reps. (For more on this, see the November issue of Registered Rep., which is in the mail now.)

We surveyed a handful of people. Here’s what they say:

Interestingly, Punk Ziegel analyst Dick Bove took a decidedly different view on O’Neal’s firing. “He should lose the position as CEO and be retained by the company,” Bove wrote to Registered Rep. in an email last night. Indeed, Bove seems somewhat sympathetic to O’Neal and critical of Merrill in general. “Simply changing the CEO is not a turnaround strategy for a trillion dollar company with tens of thousands of employees and many business lines all over the globe,” Bove says in a research report on 29 October. In fact, in the stinging research report issued yesterday (entitled “Merrill Lynch Makes Another Bad Decision—Part 3”), Bove says he has little faith in the Merrill board’s ability to build or execute a long-term business plan, a position he says he has arrived at over the last 15 years of watching the firm. “These are the ultimate run and gun boys,” he writes. “They do not believe that intellectual capital and experience matter. I would sell the stock benefiting from the this period of misplaced euphoria.” (The stock bounced more than 8 percent on Friday and another 2 percent on Monday.)

What Me? Care?

For the most part Merrill advisors, who spoke with Registered Rep., say the firm’s follies in the sub-prime write-downs doesn’t directly affect them or their clients, (other than the odd call asking what the devil $8 billion in writedowns means to their personal accounts). As one anonymous broker says, “This doesn’t affect me. Not one bit.” When it comes the impact of O’Neal’s footprint in the lives of the average Merrill rep, another broker says, “We like the guy, but you’re talking at the stratosphere level. McCann is closer to us.”

But most reps describe O’Neal’s CDO disaster as “disappointing,” and if it hurts anyone, it hurts stockholders and advisors who watched their company stock drop by about 29 percent this year. For those receiving Merrill shares in accrued deferred compensation plans, you’re feeling a lot poorer.
One advisor says that it does—or should—matter to Merrill reps. “Any advisor to say this doesn’t affect us is whistling Dixie, this is a big deal and I think it has a lot to do with the culture of the firm,” he says. “When you take a look at what O’Neal did when he took over, he essentially took everybody who could have been a competitor to him and had something to offer and put a bullet in their heads, from Jeff Peek to Winthrop Smith to James Gorman and on down.” [James Gorman left Merrill in 2005 and joined for Morgan Stanley in February 2006, sitting out a non-compete clause for six months.]

Besides the head-long plunge into CDOs (and subsequent breach in risk management), some advisors point to other short-comings. One advisor says O’Neal bought into the mortgage business (buying First Franklin, the sub-prime lender) at the top of the market. “Stan’s a bright guy, but I think he could have cared less about private client. The issue that we have with a guy like Stan O’Neal is he thinks he’s smarter than everyone else, and he’s not willing to listen to other points of view,” the advisor says. Instead he thinks O’Neal “surrounded himself with is a bunch of ass kissers and yes men.” This rep says he has a great deal of respect for Bob McCann because he is a good listener. “When McCann took over private client group, he tried to learn about it, he stood up for us, and was willing to meet with us and was willing talk with financial advisors,” he says. “He’s a tough smart guy, but he’s willing to listen to intelligent ideas. In my opinion of the people that I know, I think Bob would be a terrific CEO.”

One rep worried about the negative publicity. Given the news, he asks, would you bring your money to Merrill or, say, Goldman? "If you look at Goldman, with its performance, it's got no dents in its armor. If I've got millions to invest, I might consider Goldman first," the Merrill rep says. What really ticks him off, is that the firm's own lending standards are incredibly strict, "Yet we have no problem putting billions of dollars into sub-prime pooled products."

Analysts say it still too early to assume Merrill is the big loser in this market. Punk Ziegel’s Bove says that other firms may soon be in a similar situation, though he doubts those firms will oust their CEOs over it. “The full record has not been written. Merrill may yet prove to be at the low end of the write-offs being taken," Bove says.

If you work at Merrill, enjoy the cloak-and-dagger board room fight. In reality, things aren’t so bad. UBS analyst Glenn Schorr says little at Merrill needs to change—equities, investment banking, commodities and wealth management are in “pretty good shape,” he writes in a recent research report. “In reality, besides improving morale and settling some client jitters, we think the most critical thing will be putting in place a real risk management infrastructure and convincing the investing community that controls are in place.”

The bottom line: Merrill ought to stick to what it is good at—retail brokerage.

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