Search is on for unity at Merrill

Departing CEO leaves rift between bond traders, asset managers

October 30, 2007|By New York Times News Service

Call it a tale of two investment banks. Whoever takes over as chief executive of Merrill Lynch will assume control of what is essentially two companies: a thriving wealth management operation and a beaten-down bond business that could end the year with over $10 billion in credit losses.

The chief executive, E. Stanley O'Neal, is paying the price for pushing the firm into plummeting subprime debt securities. Directors have decided that O'Neal should leave after an $8.4 billion write-down and an unauthorized merger approach to a rival bank, Wachovia Corp. But the board has made no formal announcement.

Lost in the criticism of O'Neal has been any credit he deserved for laying a foundation for the success of Merrill's asset management business, which combines the $1.8 trillion in assets under management by the firm's brokers and its 49 percent stake in BlackRock Inc. The latter is the fast-growing asset management business run by Laurence D. Fink, the prime candidate to succeed him.

Now, the search is on for someone to bring a sense of unity to these businesses and Merrill Lynch as a whole. One possible course being floated yesterday was that the firm would announce an interim solution in the coming days, with a director assuming a temporary supervisory role while the board searched for a successor to O'Neal. A Merrill Lynch spokesman declined to comment yesterday.

The new chief will inherit a firm riven by discord. The fixed-income traders are demoralized and facing the prospect that their leaders could be forced out after O'Neal's departure, and the asset management side is angry about the damage caused to the Merrill Lynch brand by the losses and the ignominious departure of the CEO.

As for the board, it has been quicker in concluding that O'Neal should go than it has been in presenting a framework for his succession.

According to a person briefed on the board's deliberations last week, there was a sense among directors as late as Wednesday that O'Neal might be able to ride out the storm. That view changed on Thursday and Friday when his approach to Wachovia was made public and the firm's employees expressed outrage.

"It's easy to fire a CEO," said Jeffrey A. Sonnenfeld, an associate dean at the Yale School of Management. "But when you clear the deck in the guise of good governance, you create a lot of confusion and the internal hiring process can become more like a municipal city council meeting."

As the board deliberates - and it has been close to three days since it reached a broad conclusion that O'Neal should go - constituencies inside the firm and out are pushing their favorites.

Many brokers would like to see Robert J. McCann, an amiable executive who heads the brokerage division, take on a broader responsibility.

While Gregory J. Fleming, a co-president, has been hurt somewhat by his role in the Wachovia merger approach, his stature as a top investment banker and his close relationship with Fink, the leading contender for the job, make him likely to stay.

A consensus seems to be building that having these two executives in a power-sharing arrangement, with perhaps a more seasoned executive from the outside overseeing them, is the best way to bridge the gulf that exists between the bank's crucial areas.

The Merrill board must appoint a chief executive with the ability to lead and inspire a large organization. Since the late 1990s, when the race to succeed David H. Komansky as chief executive began to heat up, executive office intrigue has been a consistent theme at Merrill.

O'Neal's candidacy was championed by a cabal of powerful Merrill Lynch insiders with ties to the board, which caused him to beat out Jeffrey M. Peek, then seen as the leading contender. As CEO, O'Neal fostered a continuing sense of fear and uncertainty, countenancing feuds and jealousies among his top managers.

On the fixed-income side, the greatest challenge is persuading a skeptical marketplace that the worst is behind Merrill.

While the firm's stock is by some measures cheap, trading at a price-earnings ratio of just eight times 2008 earnings, there is still doubt among analysts about the quality of the earnings.

Numerous analysts have forecast more write-downs from the firm's troubled portfolio of collateralized debt securities to come in the next quarter.

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