By Bradley Keoun
Oct. 30 (Bloomberg) -- Merrill Lynch & Co. ousted Stan O'Neal as chairman and chief executive officer and said it will begin a search for his successor, leaving the world's biggest brokerage without a leader.
Co-Presidents Gregory Fleming and Ahmass Fakahany will run the firm, reporting to board member Alberto Cribiore, who will be a non-executive chairman until O'Neal's replacement is found, New York-based Merrill said in a statement today.
Merrill fell as much as 4.6 percent in New York trading after the firm didn't name a new CEO. O'Neal lost the confidence of investors and directors after delivering a $2.24 billion third-quarter loss, six times what the firm forecast just three weeks earlier. Merrill has declined almost 30 percent this year, the second-worst performance after Bear Stearns Cos. among the five largest U.S. securities firms.
``They have to move fast,'' said Mark Batty, who helps manage about $77 billion including Merrill shares as an analyst at PNC Wealth Management in Philadelphia. ``They have risk management issues that need to be tackled quickly.''
O'Neal, 56, and the board of directors ``agreed that a change in leadership would best enable Merrill Lynch to move forward,'' the company said in the statement announcing O'Neal's retirement after 21 years at the firm. The board will consider internal and external candidates, the company said.
List of Candidates
Contenders may include Laurence Fink, 54, who sold almost 50 percent of the BlackRock Inc. money management firm to Merrill last year, and Fleming, 44, who has spent most of his career as an investment banker at the firm. Another candidate is Robert McCann, 49, who heads Merrill's wealth-management division, including the firm's network of 16,600 brokers.
Merrill lost $1.92 to $65.50 in 4:01 p.m. New York Stock Exchange composite trading. The stock climbed 11 percent in the past two days on speculation O'Neal would go and the company might be a takeover target. Deutsche Bank AG analyst Mike Mayo estimates the firm may be worth $120 a share in an acquisition.
``Some investors were probably too optimistic, expecting a quick resolution,'' said Benjamin Wallace, who helps manage $750 million, including Merrill shares, at Grimes & Co. in Westborough, Massachusetts.
The company said today that Fleming and Fakahany will stay in their jobs as co-presidents and chief operating officers. Cribiore, founder of New York-based private-equity firm Brera Capital, has been a Merrill board member since 2003.
Divided Roles
Fleming will lead the ``integrated businesses'' of the company while Fakahany will lead global support, finance and human resources, Merrill said in the statement. Mayo interpreted that as more responsibility for Fleming.
McCann, who previously reported to Fakahany and Fleming, will now report only to Fleming. Chief Financial Officer Jeffrey Edwards, who reported to O'Neal, will report to Fakahany on financial matters and Fleming on risk-management.
``Whoever they're going to ask to be CEO is going to be in a very strong bargaining position,'' said Henry Higdon, managing partner of recruiter Higdon Partners LLC in New York. ``It's a mess and it's not going to be reversed overnight.''
Fink is probably Merrill's first choice, ``and I don't think there's a close second,'' Higdon said, adding Fink may not feel the same. ``He's not going to say, `Thank you very much, this is a job I've always wanted.' He's going to say, `Let's talk about terms.' '' BlackRock spokesman Brian Beades said the firm won't comment on ``market rumors or speculation.''
No Severance
The last time a major Wall Street chief was ousted -- Morgan Stanley's Phil Purcell, in June 2005 -- it took two weeks for the board to name his replacement, John Mack.
O'Neal won't receive a severance package, spokeswoman Jessica Oppenheim said. He'll keep restricted stock and options awarded in previous years that required vesting, she said.
Merrill said in a regulatory filing today that O'Neal won't get a bonus for 2007, and that he can't join certain competitors for 18 months. The value of his retained stock awards and benefits was approximately $161.5 million as of Oct. 29, the filing said. He'll get an office and an executive assistant for up to three years, the filing said.
BlackRock said in a separate statement that O'Neal had quit its 16-member board, which also includes Fleming and David Komansky, Merrill's chief before O'Neal.
Merrill's new boss will need to staunch an exodus of its best people, said William Fitzpatrick, a financial services analyst at Johnson Asset Management in Racine, Wisconsin, which oversees $1.7 billion and doesn't own Merrill shares.
Talent Hunt
``A lot of competitors are going to come in and they're going to grab Merrill's best talent,'' Fitzpatrick said. As for the rest, ``They're going to be giving out pink slips this year, not bonuses. All the bankers know that.''
Merrill reported an $8.4 billion writedown for subprime mortgages, asset-backed bonds and loans gone bad last week, the biggest quarterly debacle ever in the securities industry.
The loss followed O'Neal's $1.3 billion acquisition in December of mortgage lender First Franklin Financial Corp., the 10th-largest U.S. originator of subprime mortgages, which are made to people with the weakest credit. The takeover contributed to losses as the housing market suffered its worst slump since the 1991 recession.
First Franklin was embarrassing for O'Neal since he had criticized acquisitions made by Komansky, whose expansion culminated in a $1.7 billion charge in the fourth quarter of 2001. That's now dwarfed by O'Neal's third-quarter loss. Merrill may have to write down another $4 billion in the fourth quarter, said Meredith Whitney, a New York-based analyst at CIBC World Markets, in a note sent to clients last week.
Less Equity
``The truth is there's probably an additional writedown coming in the fourth quarter,'' said Fitzpatrick. ``Until we get a little more color on that, it's probably a good time to be sitting on the sidelines.''
Merrill's $8.4 billion writedown may have wiped out a fifth of shareholders equity, leaving the firm with $38.8 billion of assets minus liabilities. The probability of Merrill defaulting on debt within five years more than doubled since June 30, rising to 7 percent yesterday from 3 percent, according to credit- default swap traders.
Losing ``20 percent of shareholders' equity in one fell swoop is a serious blow,'' said Robert Willens, the accounting analyst at Lehman Brothers Holdings Inc. in New York. ``It might take them two to three years to earn that capital back.''
Angry Board
O'Neal angered the board by approaching Wachovia Corp. Chairman and CEO Kennedy Thompson earlier this month about a possible merger without consulting Merrill directors, the New York Times reported Oct. 26, citing people with knowledge of the matter. The board has discussed replacing O'Neal with candidates, including Fink and NYSE Euronext CEO John Thain, the Times said.
The board includes Flagler Development Group CEO Armando M. Codina and Judith Mayhew Jonas, former provost of Kings College at the University of Cambridge, England, who will serve as directors until next year.
Merrill shares had risen 55 percent since O'Neal took over on Dec. 2, 2002, while the 12-member Amex Broker/Dealer Index surged 161 percent and New York-based Goldman Sachs Group Inc., the biggest securities firm by market value, tripled.
O'Neal joins a growing list of investment bank executives who have lost their jobs because of losses in the fixed-income markets. UBS AG, the biggest Swiss bank, dismissed CEO Peter Wuffli in July and said earlier this month that finance chief Clive Standish and investment-banking head Huw Jenkins were stepping down. Others ousted include Bear Stearns Co-President Warren Spector and Citigroup Inc. trading head Thomas Maheras.
O'Neal, who earned his way through college by working at a General Motors Corp. assembly plant in Georgia, got a master's degree from Harvard Business School in 1978 and worked as a finance executive at General Motors before joining Merrill as an investment banker in 1986. He was promoted to president in July 2001.
A Merrill investor, Life Enrichment Foundation, sued the firm today in Manhattan federal court for misleading investors about the extent of its CDO investments. The suit, which requests class-action, or group status, seeks unspecified damages.
``The suit has no merit,'' Merrill spokesman Mark Herr said. ``We reported our financial data accurately.''
Merrill is a passive minority investor in Bloomberg LP, the parent of Bloomberg News.
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