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January 1996

Merrill Lynch: Four legs good, two legs bad


The professionals who left Wall Street firm Merrill Lynch last year compare it with George Orwell's Animal Farm. It's a pretty successful farm, and more human than most. But have the guys at the top pushed their teamwork ethos and those catchy slogans a little too far? Michelle Celarier reports




At Merrill Lynch, there was no doubt about it: Edson Mitchell was a star. Largely under his direction, the investment bank's fixed-income division leapt from nowhere in the 1980s to become the number one global player. Using swaps and derivatives talent hired from JP Morgan and Morgan Stanley, Merrill surprised its competitors by becoming one of the most creative and innovative players on Wall Street. By 1995, the charismatic Mitchell was said to be in command of a $1 billion revenue stream - the driving force behind Merrill's international expansion in recent years.

But last January, Merrill embarked on a strategic reorganization, and the future of Mitchell's star status seemed to be thrown into question. He was asked to head equities, a move his superiors said was designed to broaden his management capabilities. But outsiders interpreted the reassignment as a way of breaking down Mitchell's power base, as part of an attempt to rid Merrill of the fiefdoms they say had plagued it for years. After weeks of negotiations, Mitchell turned down the new assignment and defected in May to Deutsche Morgan Grenfell in London. He was the most senior person to leave Merrill in more than a decade.

Mitchell's departure, followed by more than a dozen of his most gifted subordinates, dismayed many senior Merrill executives, including president David Komansky (on the left in the cartoon, with chairman Daniel Tully). "He was the most creative person in fixed income," sighs Komansky. "Believe me, I wish he hadn't gone." Over the next few months, such highly-regarded Merrill executives as Grant Kvalheim, who had headed capital markets, and Henry Yordan, a managing director, joined Deutsche Morgan Grenfell in New York. Top-flight debt salesman Michael Phillips went to work with his former boss in London. Admits Komansky: "I regret losing many of them."

It seems obvious now that Mitchell inspired deep loyalty in his division, where former employees say he fostered an incredible team spirit. For years, Merrill's inferiority complex in investment banking was what propelled his drive. But it may also have inhibited Mitchell from extending his team spirit to many other parts of the institutional side of the firm, which former fixed-income professionals admit they viewed as mediocre and inferior. Under Mitchell, says one individual close to Merrill: "Fixed income was much less cooperative with other parts of the firm. They thought investment bankers didn't add value. They wanted to do their own deals, and print their own tickets."

To Komansky, and no doubt to many others on the Merrill executive team, that meant one thing. "Edson's myopic drive to build his businesses" resulted in a "perception of a lack of what we call teamwork" explains the president. But, as even Komansky acknowledges, Mitchell's defection points to one of the most difficult issues facing Wall Street in general and Merrill in particular. And that is the inevitable tension between the creative entrepreneurial spirit - with its accompanying egos - that drives the best of Wall Street, and the organizational structure needed to keep a colossus like Merrill from imploding.

Cold comfort

The record of star-based cultures in recent years does not inspire imitation. Salomon Brothers, Drexel Burnham Lambert and First Boston are a few that come to mind. But the flipside is not so attractive either. Merrill, which has struggled so long to become a top global investment bank, may be at a watershed. Those who've left fear that the firm is heading for a period of conformity and mediocrity, uttering with distaste the word "technocracy". "The fact that they are losing so many people means something is not quite right," adds a competitor in the derivatives area. "We see them as being less competitive, less aggressive."

Komansky acknowledges that he spends a lot of time these days thinking about the tension between entrepreneurialism and management, and says there has to be room at Merrill for creative people "who don't walk down the middle of the road. But they have to be on the reservation." At Merrill, that means abiding by the firm's five hallowed "principles" which are plastered all over the bank's walls. They even flash by, item-by-item, on secretaries' computer screen-savers: "Client focus. Respect for the individual. Teamwork. Responsible citizenship. Integrity."

The principles are simplistic and hokey. But employees seem to take them to heart. Even an avowed cynic at Merrill says defensively: "People need a value system to subscribe to. At the end of the day, integrity and reputation are everything." The principles, first given this capsule form in 1992, are considered a distillation of Merrill's culture. They are what many see as one of the firm's greatest achievements and the legacy of chairman Daniel Tully. "The culture Merrill's been able to build is one of the firm's unpublicized successes," says Brian Barefoot, a senior vice-president in merchant banking who left Merrill in 1992 after 25 years. (Last year, he joined PaineWebber as an executive vice-president.)

In the eyes of Wall Street, Merrill Lynch is a blue-collar firm that has climbed the lofty pinnacle of high finance through hard work, playing by the rules and a little luck. A self-made firm, it is the embodiment of the American dream. Not only did Merrill bring Wall Street to Main Street, it has taken it to the rest of the world. "Street smarts [street wisdom] and common sense" are the characteristics one former executive attributes to chairman Tully and president Komansky, the men who run the firm. Both were raised in the working-class boroughs of New York City. Tully says this taught him to get along with other cultures. Komansky keeps a photograph on his office wall of the Brooklyn tenement where he grew up - a constant reminder of his humble roots.

There is ample contrast between that tenement the other side of the East River and the World Financial Center - the heart of Merrill's 35-country empire - on the west side of Manhattan. The ultra-chic complex of financial institutions, shops and restaurants forms a cluster of glass-clad postmodern architecture overlooking the Hudson River. Merrill's 1987 move into its grand 34-storey home was a sure sign of its ambitions, which were tested immediately by that year's crash in the world equity markets. Today, it is the biggest Wall Street firm, with $5.8 billion in capital and an estimated $20 billion in revenues last year. It is often compared with larger, more highly-capitalized commercial banks in the US and abroad because of its size and the breadth of its business. Analysts are expecting net income to top $1 billion for 1995. In international securities business, it beats all the competition. Merrill has held the record for cross-border financings for seven years. The recent purchase of London-based market-maker Smith New Court also makes it the world's largest equities house in terms of people.
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