Stan O’Neal’s legacy to Merrill Lynch

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The Merrill CEO had to go, but the firm he leaves is much stronger than the one he inherited.

"Already the revisionists are out trying to tarnish O’Neal’s achievements. He still has many enemies from the way he ruthlessly removed the Merrill old guard when he became CEO. Now they see a chance for revenge."
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The CEO suites of Wall Street have their first vacancy sign since the world learnt what sub-prime means.

While others such as Jimmy Cayne at Bear Stearns and Chuck Prince at Citi hang on for dear life, Merrill Lynch CEO Stan O’Neal has been forced to bite the bullet.

Rightly so. Any individual who, until recently, held the titles of chairman, CEO and president has the right to the glory of success, but has to carry the can when things go wrong. And they don’t get much worse than a $8.4 billion write-down in one quarter. Merrill became the leading CDO underwriter under O’Neal’s watch, and he sanctioned the purchase of mortgage originator First Franklin just as the bucks were about to stop flowing into the sub-prime market and begin pouring out.

Two misjudgments sealed O’Neal’s fate – the $3.4 billion upwards revision of losses in mortgage-related assets in the space of three weeks; and the CEO’s decision to approach Wachovia about a possible merger, apparently without the consent or knowledge of other senior executives and board members.

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Each factor reflects badly on Merrill’s leadership. The real mortgage losses incurred gave the clear impression that the firm had no idea of its exposures. Its risk management looked out of control. For an investment bank that prided itself on a streamlined executive structure that allowed it to assess risks and make decisions at speed, such an impression is fatal.

The approach to Ken Thompson at Wachovia made Merrill look weak. And it suggested that O’Neal didn’t have the stomach for the fight any more – something that insiders had begun to query earlier in the year, when O’Neal passed on the co-presidency to Greg Fleming and Ahmass Fakahany.

Every successful investment bank CEO has unique qualities. Some are simply the best dealmakers. Others have the intellectual capacity to immediately grasp the most complex opportunities. O’Neal stood out for the respect he generated – for where he had come from, for what he had achieved in his career, for the way he had transformed Merrill Lynch, and for his thoughtful yet steely approach to business. Recent events meant that respect was diminished. He had to go.

Already the revisionists are out trying to tarnish O’Neal’s achievements. He still has many enemies from the way he ruthlessly removed the Merrill old guard when he became CEO. Now they see a chance for revenge.

They conveniently forget that Merrill was a bloated, unfocused mess at the turn of the century. That without the tough decisions that O’Neal took, cutting 25,000 jobs and refocusing the business, Merrill would not have ridden the earnings wave of the past five years that has made stakeholders in most Wall Street firms very rich indeed. 

Remember also that aside from the mortgage losses Merrill’s numbers are robust. In investment banking, its M&A and equity divisions remain on a great run, while one of O’Neal’s lasting legacies will surely be the creation of a world-class commodities business. The investment management tie-up with Blackrock still looks a smart move. And Merrill remains a leading global player in private client business.

O’Neal’s denigrators will have much fun pointing out the scale of the sub-prime losses. But fans of O’Neal may choose to focus on other recent, and more positive news, when extolling the virtues of his reign.

RBS, Fortis and Santander recently completed the largest takeover in history – the era-defining hostile takeover of ABN Amro. When Barclays announced its agreed bid for ABN, every major investment bank jumped on the Barclays or ABN side in the expectation of easy fees – all, that is, except one.

Merrill’s bankers instead worked with three long-term clients to put together a rival bid which few thought had any chance of success. About six months later, when the consortium bid won the battle, Merrill scooped the entire pot of advisory fees and was beginning to reap the benefits of leading the major capital raising activities of the three winning banks – including the sole underwriting of Fortis’s €13.4 rights issue – the largest European equity offering of all time.

The firm that Stan O’Neal took over in 2001 would not have had the wit, the confidence or the stomach for a bid such as ABN Amro. As Stan O’Neal bows out, it is worth remembering this part of his legacy to Merrill Lynch.