Merrill Lynch & Co. Inc. (MER), the third-largest U.S. securities firm, has announced a plan to shore up its credit ratings and raise capital by offloading $31 billion in collateralized debt obligations (CDOs), issuing an $8.5 billion stock offering, and courting yet another cash infusion from Temasek Holdings Pte., Singapore’s sovereign wealth fund.

Temasek Holdings, which became Merrill’s largest shareholder in December, will purchase $3.4 billion of the new stock. However, Merrill Lynch will pay Temasek the sum of $2.5 billion to offset losses on the fund’s earlier investment.

Temasek plunked down $6.2 billion for an initial 9.4% stake in Merrill in December and then followed up with another $6.6 billion investment in January. Of course, Merrill Lynch stock has dropped by about 30% this year-to-date, and 60% since early December 2007.

"Temasek confirms its commitment of $3.4 billion in the public offering by Merrill Lynch, a portion of which is subject to regulatory approval," spokeswoman Myrna Thomas said in a statement. "The commitment includes a sum of $2.5 billion arising from a re-set payment."

The purchase is subject to approval by U.S. regulators because Temasek now owns more than 10% of the New York broker.

Merrill Lynch has also sold off $30.6 billion of collateralized debt obligations to Lonestar Funds for $6.7 billion dollars, roughly 22 cents on the dollar. CDOs are essentially the bundles of mortgages (many of them subprime) that were securitized by investment banks, and then sold to other investors. The CDOs collapsed with the bursting of the housing bubble.  CDOs have accounted for about $27 billion of the total $41 billion, or 65%, of the writedowns Merrill has taken in the past year.

Merrill will provide financing for about 75% of the purchase price, the company said in a statement. The sale will result in a pretax write-down of $4.4 billion.

"The sale of the substantial majority of our CDO positions represents a significant milestone in our risk-reduction effort," said Chief Executive Officer John Thain.

However, Merrill Lynch shareholders are dismayed by Thain’s actions and more to the point, his words. Thain, who took over for former CEO Stan O’Neil late last year, has for eight months insisted that Merrill Lynch was well capitalized.

"We’re very confident that we have the capital base now that we need to go forward in 2008," Thain said in January.

"We have more capital than we need, so we can say to the market that we don’t need more injections. We can confirm that we have tackled the problem," Thain told Spain’s El Pais newspaper in March.

Thain was even positive on the company’s July 17 conference call, saying: "Right now we believe that we are in a very comfortable spot in terms of our capital."

News and Related Story Links:

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• Bloomberg:
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• Reuters:
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Citigroup Inc. (C) – the U.S. financial titan still reeling from the subprime fallout – was the target of another downgrade, as Goldman Sachs Group Inc. (GS) analyst William Tanona said the bank may suffer $8.9 billion of second-quarter write-downs and be forced to cut its dividend again.

Tanona downgraded U.S. banks to “neutral” from “attractive” and added Citigroup to Goldman’s “Americas conviction sell” list, Reuters reported.

“We see multiple headwinds for Citigroup including additional write-downs, higher consumer provisions as a result of rapidly deteriorating consumer credit trends, and the potential for additional capital raises, dividend cuts, or asset sales,” Tanona wrote.

To little surprise, Citigroup’s shares sunk in morning trading, falling below their previous 52-week low of $17.99.

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Citigroup has shed more than $46 billion in write-downs and credit losses since the subprime crisis began in mid-2007. Those losses have forced the struggling bank to raise $42 billion in emergency capital, primarily through cash infusions from foreign investors and sovereign wealth funds.

For the second quarter this year, Tanona expects the bank to post a loss of 75 cents per share, a full dollar down from his previous forecast of a 25-cent per share profit. 

In January, Citigroup slashed its dividend by 41% to 32 cents, but Tanona said another cut may be necessary to preserve an annual $3.5 billion in capital in the face of dry earnings.

“Given the firm’s current level of earnings power, we do not believe the dividend is safe,” he wrote.

Merrill in the Crosshairs

Meanwhile, Merrill Lynch & Co. Inc. (MER), the world’s largest brokerage firm, may have to shed $4.2 billion in write-downs, Tanona wrote.

He expects Merrill to post a second-quarter loss of $2 a share, down significantly from his earlier forecast of a 25-cent-per-share profit. For the year, his previous forecast of an 8-cent-per-share profit is now a loss of $3.55 per share.

The latter is a strong signal that the downstream economic outlook in the second half isn’t as promising as forecast.

“The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we should have thought,” Tanoma wrote.

Despite the waist-deep troubles many financials are in, Money Morning Investment Director Keith Fitz-Gerald believes that some still represent a solid long-term investment.

And his favorite is Citigroup.

“Citi is trading for a pittance,” Fitz-Gerald said. “Value investors will recognize this as important because history shows that the lower P/E ratios are when you make an investment, the better your overall returns tend to be. Generally, large globally diversified companies are considered bargains at a P/E of 12, which makes Citi a screaming deal at 7 or 8.”

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By Mike Caggeso
Associate Editor

The whirlwind of recent beverage buyouts may continue, as Foster’s Group Ltd. (OTC: FBRWY) – Australia’s biggest beer and wine maker – may be a takeover target after it conducts a review of its wine business.

That assessment didn’t come from the company, however, but rather Merrill Lynch & Co. Inc. (MER) analysts. Foster’s Chairman David Crawford said in a conference call that he’d consider “all alternatives” about the company’s wine unit, which is the second largest in the world, Bloomberg reported.

A day before Merrill’s review, Chief Executive Officer and Executive Director Trevor Louis O’Hoy resigned after the company cut its earnings forecast and announced a $730 million write-down of its wine unit. O’Hoy will stay on board until a replacement is found.

Foster’s now expects constant currency earnings per share growth to fall between 5% and 7%, well below its previous guidance of approximately 10% growth.

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In 2005, the company doubled the size of its wine business with the $3 billion (A$3.2 billion) acquisition of Southcorp. Crawford said in a statement earlier this week that Foster’s didn’t execute the Southcorp integration to their expectations, making operating conditions more challenging.

Merrill’s report didn’t surprise Crawford, who said earlier this week that the company’s returns “are not acceptable.”

“We must also recognize and acknowledge that we paid too much to acquire wine assets… and the Board is fully focused on delivering value for shareholders,” he said in the statement. 

Beverage Providers Stirring Global M&A

Should Foster’s put itself on the block, it would join other major global beverage providers that have been on the giving and receiving end of billion-dollar buyout offers.

In late-May, news surfaced that Belgium-based InBev NV was considering a $46 billion takeover bid of American’s beer titan Anheuser-Busch Companies Inc. (BUD). InBev is the world’s largest brewer, whose line of beers includes Stella Artois, Beck’s and Brahma.

In March, France’s Pernod Ricard SA won a highly contested auction to buy V&S Group – makers of Absolut vodka and Cruzan rum – from the Swedish government for $8.9 billion.

In January, Carlsberg A/S and Heineken N.V. (OTC: HINKY) agreed to buy Scottish & Newcastle PLC for $15.4 billion.

And late last year, British-owned SAB Miller PLC (OTC: SBMRY) and Canada’s Molson Coors Brewing Co. (TAP), agreed to merge their U.S. brewing operations.

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Merrill Lynch & Co. (MER) ripped the Band-Aid off its investors today (Thursday), when it posted its third consecutive quarterly loss and announced 3,000 job-cuts in its first-quarter earnings statement. 

The third-largest U.S. securities firm lost $1.96 billion, or $2.19 a share, compared to a $2.16 billion gain, or $2.26 a share, a year earlier.

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Over the first quarter, the company recorded more than $9.5 billion in write-downs and losses on subprime mortgages and other risky assets. It also posted $2.9 billion in net revenues (a 69% drop) and $805 million in investment-banking fees (a 40% drop) in "this challenging market environment, which continued to deteriorate during the quarter," according to the company’s earnings release.

Merrill’s earnings missed analysts’ already low expectations, and it may cost the already struggling financial firm.

Citing "deteriorating conditions in the mortgage market" and the potential for another $6 billion in write-downs, Moody’s Investors Service said it may cut Merrill’s credit rating, which would be the second time in six months. In October, Merrill’s rating was lowered one level to A1, the fifth highest of 10 investment ratings, Bloomberg reported.

And some top investors are demanding better performance.

"Merrill Lynch has to show profitability," Ken Crawford, senior portfolio manager at Argent Capital Management in St. Louis, which owns about 160,000 Merrill shares, told Bloomberg. "They can’t have negative return-on-equity quarters and expect to make investors happy."

The rest of this year will be a true test for Chairman and Chief Executive John Thain, who took over Stan O’Neal’s post Dec. 1 after leaving his CEO post at NYSE Euronext (NYX). 

"Despite this quarter’s loss, Merrill Lynch’s underlying businesses produced solid results in a difficult market environment," Thain said in the company statement. "… we remain well capitalized. In addition, our global franchise is positioned strongly for the future, and we continue to invest in key growth areas and regions."

Though Merrill and many financial service companies are still struggling to rebound from the subprime-induced credit crisis, there’s a small group of peer companies that may have put the worst behind them.

Goldman Sachs Group, Inc. (GSC) Morgan Stanley (MS) and Lehman Bros. Holdings Inc. (LEH) all beat earnings estimates last month.

Citigroup Inc. (C) – one of the hardest-hit financials – reports its first-quarter earnings tomorrow (Friday).

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• Merrill Lynch & Co.:
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• Bloomberg News:
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Merrill Lynch & Co. Inc. (MER) announced Monday that it will receive a needed cash infusion of $6.2 billion – most of it from Singapore’s state-run Temasek Holdings. Temasek, a sovereign-wealth fund, will invest up to $5 billion, while the remainder will come from Davis Selected Advisors LP. 

Merrill Lynch, the United States’ largest brokerage firm, has seen its stock drop 40% this year and faces its worst loss in the firm’s 93-year history. E. Stanley "Stan" O’Neal, former chief executive, retired at the board’s urging in late October after announcing $8 billion in subprime-related write-downs.

"One of my first priorities at Merrill Lynch was to strengthen the firm’s balance sheet, and today we have made great progress towards that by bolstering our capital position through these investments," John A. Thain, Merrill’s newly appointed chairman and CEO, said in a statement.

The Merrill Lynch investment is the latest in a series of multi-billion-dollar cash infusions provided by the world’s sovereign wealth funds. Ailing U.S. financial institutions have found the state-run venture funds to be generous benefactors.  Other recent deals have included the Abu Dhabi Investment Authority’s $7.5 billion infusion in Citigroup Inc. (C), the Government of Singapore Investment Corporation’s $9.75 billion stake in Europe’s UBS AG (UBS), and China Investment Corp.’s $5 billion investment in Morgan Stanley (MS).

State-run sovereign-wealth funds currently control $3 trillion – a figure experts expect will soar to $12 trillion by 2015. For perspective, the estimated U.S. gross domestic product for 2006 was slightly more than $13 trillion. Some forecasts say that these "Cash Barons" will control $20 trillion by the middle of the next decade.

The Merrill Lynch deal is the latest involving a U.S. financial institution. Temasek Holdings initially will make a $4.4 billion investment in Merrill Lynch’s common stock at $48 per share, and also has the option to purchase an additional $600 million of Merrill Lynch common stock by March 28.  Davis Selected Advisors’ $1.2 billion investment will also be priced at $48 per share, a significant discount to the current market price. 

Both Temasek and Davis Selected Advisors will be passive investors, with no governance or rights of control, and no influence on Merrill’s day-to-day operations.

With the so-called "Cash Barons" of Asia and the Middle East making such large investments in leading global banks, some shareholders have become concerned about underlying political motives of the state-run ventures.  Although the sovereign wealth investors are considered passive, without representation on the board of directors, many worry about the influence a 10% stakeholder could still exert.

UBS, one of Europe’s largest and most influential banks, recently ran into resistance from shareholders over its $11.5 billion cash infusion. On Dec. 10, the bank disclosed that the Government of Singapore Investment Corporation (GIC) and an undisclosed Middle East investor were behind the investment.

While UBS – hard hit by the subprime crisis – was in dire need of the added capital, current shareholders weren’t happy with the arrangement, as the move gave Singapore a 9% stake in the company, with an additional 2% position going to the mystery Middle Eastern investor.

One influential Swiss institutional investor called on fellow shareholders to block the proposal, while another demanded a special audit to investigate how the bank could have sustained such massive losses. One upset investor went as far as filing a shareholder lawsuit against UBS, claiming the bank was cloudy in reporting the subprime holdings that eventually led to write-downs.

"I believe this situation disadvantages existing shareholders," Ulrich Grete, institutional investor and head of the Swiss Social Security Compensation Fund, told the Financial Times. Grete also insisted UBS name the mystery investor, as that shareholder now possesses one of the largest stakes in the bank.

The Financial Times recently reported that the mystery investor is none other than Prince Sultan, the crown prince and defense minister of Saudi Arabia.

"It’s a reasonable assumption the ruling family was involved and approved [the deal]," a source with knowledge of the negotiations told the widely read business journal.

Separately, the Ethos Foundation, a Swiss investment lobby, said it would ask the bank to clarify its $14 billion loss from U.S. subprime mortgage investments. UBS said it would "carefully answer all Ethos’ questions."

Dominique Biedermann, an Ethos director, said the plan to make Singapore the largest UBS shareholder at 9% was "not necessarily ideal."

Money Morning Executive Editor William Patalon III contributed to this report.
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DLF Ltd., the largest real estate company in India, announced the sale of a minority stake in several of its assets yesterday (Tuesday). According to Bloomberg News, the divestiture brought in $426 million dollars for a total of eight housing projects located throughout India.

DLF sold a 49% stake in seven housing projects to a Merrill Lynch & Co. Inc. (MER) fund for $377 million.  Those projects are located in Madras, Bangalore, Kochi, and Indore, and should be fully developed in eight years, according to DLF. DLF also sold a 49% stake in a housing project in the northern state of Haryana to Brahma Investments for $49 million.

It’s no surprise that more and more private equity investors are looking to scoff up Indian real estate considering Moody’s Investors Service (MCO) said just a few months ago that the Indian real estate industry is poised to grow seven-fold to $90 billion by 2015.

Indian property developers have raised more than $7 billion by selling shares in the local market, as well as on London’s Alternative Investment Market, since August 2006.

On the shortlist of private equity investors yet to lay claim to any Indian land is Donald Trump Jr., son of the famed business mogul, who said The Trump Organization could make its move in India some time next year. "I would like to take advantage of hotels and resorts coming up for future investment," Trump Jr. said at a real estate conference in Mumbai.

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A Wall Street investment bank yesterday (Thursday) upgraded its ratings on Merrill Lynch & Co., Inc. (MER) after the company announced it filled its empty chief executive officer slot with John Thain, CEO of the NYSE Euronext (NYX). 

Credit Suisse Group (CS) raised its rating of Merrill Lynch shares from "Neutral" to "Outperform," predicting that Thain’s steady hand is exactly what the embattled lender needs to rebound from the subprime market fallout.

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Other analysts praised also the move. Citigroup Inc. (C), which also ousted its CEO recently, was reportedly considering Thain as a candidate, too.

"Thain is the absolute best possible candidate, as he brings experience that is both deep in years and functionally broad," Fox-Pitt Kelton said in an analyst’s report, cited by MarketWatch.

Before Thain’s time at NYSE, he was president and chief operating officer at Goldman Sachs Group Inc. (GS). 

Thain’s first day at Merrill Lynch will be Dec. 1. He takes over for ousted CEO E. Stanley "Stan" O’Neal.

In an interview on CNBC TV, Thain declined comment on future Merrill write-downs, but he did say that the banking industry likely faced three to six months’ worth of additional losses from subprime mortgages and collateralized debt obligations (CDOs).

"I don’t think we’ve seen the bottom," Thain told CNBC. [For a related story on the continued write-downs by the banking sector in today's coverage, please click here].

Merrill is unlikely to get out of fixed-income businesses, such as mortgages and underwriting CDOs. The reason: They are attractive and profitable businesses if the risks are managed closely, Thain said.

"You have to take measured risk," he said during the interview with the widely watched cable TV network. "That’s fine. It’s a question of how you size that risk."

Punk Ziegel & Co. banking analyst Richard Bove, one of the few analysts who has repeatedly made the correct calls about the problems facing the U.S. financial-services sector, called Thain’s hire "a big plus" for Merrill because the executive has the ability to solve the company’s key problem: risk management. Thain also has a reputation for never having dodged making tough personal decision.

Even so, Bove noted in a research note he penned yesterday (Thursday), "Mr. Thain is not a miracle worker and the markets Merrill serves must improve before the stock becomes a ‘Buy’."

Bove is well respected because he always tells both sides of a story, and doesn’t gloss over the negatives at the companies he covers. Indeed, he highlights them for clients and investors.

So despite Thain’s reputation and generally solid record, Bove said, it’s important to note that earnings actually declined during the executive’s last two years at Goldman Sachs. Nor was Thain able to reverse, or even stem, market-share losses at the NYSE.

"In sum, [as] considerable as his abilities might be, he has been powerless to reverse major trends in the business in which he operates [no one can]," the analyst wrote.
"In sum," Bove concluded, "we like the company and the new manager. I do not like the markets."

News and Related Story Links:

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• MarketWatch:
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• MarketWatch.com:
  
  Merrill Lynch Taps NYSE’s Thain as New CEO.

By Jason Simpkins
And William Patalon III
Money Morning Editors

Just days after reporting the biggest quarterly loss in its history, Merrill Lynch & Co Inc. (MER) yesterday (Tuesday) forced out Chairman and Chief Executive E. Stanley "Stan" O’Neal, ending days of speculation about the embattled executive’s fate.

The New York-based Merrill has, in recent weeks, been the focus of scathing media and analyst reports after it badly misjudged the severity of its own subprime mortgage losses. Just last week, in reporting its biggest quarterly loss in 93 years, Merrill wrote off $8.4 billion in subprime debt and other obligations.

But what really stunned Wall Street about the third-quarter earnings report was the fact that Merrill clearly didn’t have a clue about the depth of its problems. Not only was the $8.4 billion hit nearly double what the firm had predicted only three weeks before, the write-downs of subprime mortgages, asset-backed bonds and leveraged loans combined to generate a third-quarter loss of $2.24 billion – six times the company’s initial estimate.

When Merrill’s plan for reducing its remaining overall debt exposure also failed to reassure Wall Street, the investment-banking firm found that it had lost even more credibility. And some analysts predicted that Merrill might well be looking at $4 billion in additional write-offs in the fourth quarter, according to Forbes.com.

O’Neal shouldered much the blame afterwards, even admitting himself that the company was not adequately protected from the subprime mortgage collapse.

As bad as the company’s financial performance has been, it was apparently O’Neal’s failure to inform his board of directors about some merger talks he’d held that sealed his fate, The New York Times reported. On Friday, revelations surfaced that O’Neal floated the idea of a merger deal past Ken Thompson, CEO of the Charlotte-based Wachovia Corp. (WB) – without first informing board members. When his attempted maneuverings became public, the board soon decided that O’Neal should be dismissed.

Bloomberg News reported that O’Neal would depart with $161.5 million of securities and retirement funds, according to a Securities and Exchange Commission regulatory filing. In its announcement, the company said that O’Neal was "retiring” effective immediately, a technicality that allows the executive to keep any prior stock bonuses that he might otherwise have to forfeit. As part of the termination agreement, O’Neal gets an office and an executive assistant for up to three years, the filing said. But he won’t get a bonus for this year, Merrill Lynch said.

Merrill, the world’s largest brokerage house, said that board member Alberto Cribiore will serve as a non-executive chairman – on an interim basis. And, in a move that surprised Wall Street, the day-to-day operations will be supervised by current Merrill Lynch co-presidents, Ahmass Fakahany and Greg Fleming, according to a report by Reuters.

Cribiore, founder of private equity firm Brera Capital, will chair a search committee to find a permanent successor to O’Neal. In a company statement, Merrill said the committee would look inside and outside the company for a replacement.

Fleming’s will oversee risk management, a task previously associated with Fakahany, who the company said would lead global support, finance and human resource functions.

Michael Holland, who oversees $4 billion of assets at Holland Co, told Reuters that the market seemed to be saying that Merrill’s troubles are not over. Indeed, Holland said he was actually surprised that Fakahany remains in leadership. Before the announcement, sources told Reuters the Fakahany was expected to resign and later added they still did not expect the executive to remain with the company over the long term.

With a new management team coming in, the speculation about additional write-downs might well become a reality, Deutsche Bank analyst Mike Mayo wrote in a research note Sunday night. The new CEO – wanting to make a decisive statement for Wall Street – is likely to adopt a "more conservative" approach than O’Neal in valuing the collateralized debt obligations (CDOs) that remain on Merrill’s balance sheet. [CDOs combine slices of assorted types of debt into a tradable financial instrument backed by that debt].

Mayo, of Deutsche Bank (DB), estimates that Merrill would have to write down another $4 billion worth of its CDOs to make that happen. The result: Merrill will have to deal with a second straight quarter of operating losses.
Mayo said a new CEO would face three challenges in taking the helm at Merrill:

• Get the financial numbers right and restore investor confidence.
• Regain credibility and trust with investors.
• And address the lack of risk controls without hampering the innovation and corporate culture that pervades "the 7/8ths of the company that is performing well."

In a research note and in media interviews, Punk Ziegel & Co. analyst Dick Bove – whose analyses of financial firms during the credit crisis have proved prescient time and again – was skeptical that forcing out O’Neal would, by itself, be enough to fix Merrill.

"Pin the tail on O’Neal, blame him for all of the company’s current problems, and kick him out," Bove told The Associated Press. Then bring a white knight in and immediately resolve these problems and, possibly, in the process, merger Merrill out of existence, so that everyone will make their fortunes."

However, such an outcome may not be realistic, Bove said, further expressing his skepticism in a research note, CNNMoney.com reported.

Wrote Bove: "Can a company with an estimated $1 trillion-plus in assets and tens of thousands of employees spread out over multiple businesses and in multiple countries be turned around simply by changing the CEO?"

As Forbes magazine reported, Merrill Lynch may now be in the market for a new leader – but it just as badly needs a well-crafted corporate strategy.

Over the past decade or so, Merrill has developed a reputation for putting its full effort behind a number of "big ideas," only to cut and run when things didn’t work out or after it met with more than a modicum of resistance.

Indeed, in an interview with Forbes, in his inimitable style, Punk Ziegel’s Bove criticized Merrill’s "hummingbird" pattern of doing business, stating that "they are the next-trade guys. They can’t hold onto a strategy. They need to stumble onto something they can embrace."

Like most brokerage firms, Merrill was staggered by the implosion of the dot-com bubble. Since that time, Forbes reports, Merrill "vacillated" between a number of strategies, an approach that all-too-often had it in the very position it would exhort clients to avoid – chasing an already hot market. In fact, it piled into subprime mortgages last year – at the housing market’s peak – and in December spent $1.3 billion to buy lender First Franklin from National City Corp. (NCC).

A week ago, O’Neal promised shareholders to ratchet back on its more-risky fixed-income activities, to throttle down risk-taking in general, and to pursue business in potentially more lucrative areas, such as private-equity investments, last week to pull back on fixed-income activities, rein in risk-taking and steer capital spending toward potentially more lucrative activities, like private equity.

But it was clearly too late. Delays in the announcement on O’Neal’s forced departure touched off speculation that Merrill may have been trying to strike a deal with a rival – the initiative that sealed O’Neal’s fate when he tried to engineer a deal all by himself. Right now, however, some of the most likely suitors are dealing with problems of their own.

While it might take some additional time to strike a deal, it might be worth the effort for the buyer. Deutsche Bank’s Mayo says Merrill is worth $100 a share to $120 a share in a takeover, a premium of 50% to its current price. The hidden value: Merrill’s brokerage unit and its investments in BlackRock Inc. (BLK) and Bloomberg, he said. At that price, a buyer would be getting the investment banking division – which as a standalone businesswould trade at an estimated 1.4 times book value – essentially for free, Forbes reported.

Merrill’s shares closed yesterday at $65.56, down $1.86, or 2.76%, per share. In the last 52 weeks, the shares have traded between $59.14 and $98.68 each.

News and Related Story Links:

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• Forbes.com:
  Merrill Needs a Plan (And a New Leader).

• Bloomberg News:
  Merrill Lynch’s O’Neal Departs With $161.5 Million Plus Perks.

• CNNMoney.com:
  Merrill Lynch’s CEO To Depart Amid Board Pressure: Reports.

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Although some early reports yesterday (Monday) stated that O’Neal had volunteered to leave Merrill Lynch as the cacophony of negative press spiraled higher and higher, by late in the trading day most reports stated he’d been ousted by a highly peeved board of directors. In fact, The Wall Street Journal described O’Neal’s split with Merrill as a "forced departure."

The Merrill Lynch board will likely conduct a broad search – both inside and outside the investment-banking company – for O’Neal’s successor, the reports stated, most of them citing unnamed sources close to the company.

The New York-based Merrill has in recent weeks been the focus of scathing media and analyst reports after it badly misjudged the severity of its own subprime mortgage losses. Last week, in reporting its biggest quarterly loss in 93 years, Merrill wrote off $8.4 billion in subprime debt and other obligations.

But what really stunned Wall Street about the third-quarter earnings report was the fact that Merrill clearly didn’t have a clue about the depth of its problems. Not only was the $8.4 billion hit nearly double what the firm had predicted only three weeks before, the write-downs of subprime mortgages, asset-backed bonds and leveraged loans combined to generate a third-quarter loss of $2.24 billion – six times the company’s initial estimate.

When Merrill’s plan for reducing its remaining overall debt exposure also failed to reassure Wall Street, the investment-banking firm found that it had lost even more credibility. And some analysts predicted that Merrill might well be looking at $4 billion in additional write-offs in the fourth quarter, according to Forbes.com.

O’Neal shouldered much the blame afterwards, even admitting himself that the company was not adequately protected from the subprime mortgage collapse.

As bad as the company’s financial performance has been, it was apparently O’Neal’s failure to inform his board of directors about some merger talks he’d held that sealed his fate, The New York Times reported. On Friday, revelations surfaced that O’Neal floated the idea of a merger deal past Ken Thompson, CEO of the Charlotte-based Wachovia Corp. (WB) – without first informing board members. When his attempted maneuverings became public, the board soon decided that O’Neal should be dismissed.

Candidates to replace O’Neal as head of the securities giant include Laurence Fink, chairman and CEO of the investment firm BlackRock Inc. (BLK), and Gregory Fleming, Merrill’s co-president, according to a media report. O’Neal headed deal talks last year in which Merrill sold its asset-management business to Fink’s company in exchange for a 49% ownership stake in BlackRock.

With a new management team coming in, the speculation about additional write-downs might well become a reality, Deutsche Bank analyst Mike Mayo wrote in a research note Sunday night. The new CEO – wanting to make a decisive statement for Wall Street – is likely to adopt a "more conservative" approach than O’Neal to valuing the collateralized debt obligations (CDOs) that remain on Merrill’s balance sheet. [CDOs combine slices of assorted types of debt into a tradable financial instrument backed by that debt].

Deutsche Bank’s Mayo estimates that Merrill would have to write down another $4 billion worth of its CDOs to make that happen. The result: Merrill will have to deal with a second straight quarter of operating losses.
Mayo said a new CEO would face three challenges in taking the helm at Merrill:

• Get the financial numbers right and restore investor confidence.
• Regain credibility and trust with investors.
• And address the lack of risk controls without hampering the innovation and corporate culture that pervades "the 7/8ths of the company that is performing well."

In a research note and in media interviews, Punk Ziegel & Co. analyst Dick Bove – whose analyses of financial firms during the credit crisis have proved prescient time and again – was skeptical that forcing out O’Neal would, by itself, be enough to fix Merrill.

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"Pin the tail on O’Neal, blame him for all of the company’s current problems, and kick him out," Bove told The Associated Press. Then bring a white knight in and immediately resolve these problems and, possibly, in the process, merger Merrill out of existence, so that everyone will make their fortunes."

However, such an outcome may not be realistic, Bove said, further expressing his skepticism in a research note, CNNMoney.com reported.
Wrote Bove: "Can a company with an estimated $1 trillion-plus in assets and tens of thousands of employees spread out over multiple businesses and in multiple countries be turned around simply by changing the CEO?"

Merrill’s shares closed yesterday at $67.42, up $1.33, or 2.01%, per share. In the last 52 weeks, the shares have traded between $59.14 and $98.68 each.

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