Defending his decision to drive Merrill Lynch & Co. Inc. into the arms of Bank of America Corp. in less than 48 hours of negotiations, Merrill chief executive John Thain told the firm's 16,000 brokers last Monday that he had saved their jobs.
Defending his decision to drive Merrill Lynch & Co. Inc. into the arms of Bank of America Corp. in less than 48 hours of negotiations, Merrill chief executive John Thain told the firm's 16,000 brokers last Monday that he had saved their jobs.
Belying his reputation as a cold-blooded technocrat, who critics once dubbed I, Robot, he combined withering sarcasm with charm in a presentation that convinced many in his audience to embrace him as a reluctant hero for accepting the North Carolina-based bank's offer the previous day. Mr. Thain's presentation, to an internal audience at Merrill's New York headquarters that was broadcast throughout the company's rambling branch system, came before the government an-nounced plans for a bailout that might relieve Merrill of billions of dollars of toxic securities. A Merrill spokeswoman declined comment on whether Mr. Thain would have done the deal if he had known of the bailout plan.
Mr. Thain blamed Merrill's fate on ratings agencies and short-sellers. He acidly tweaked the head of Merrill's wealth management division for possibly leaking details of the deal and made it clear how close Merrill was to collapse before he sealed the transaction.
Mr. Thain said Bank of America itself pulled its trading line with Merrill in the days leading up to the deal, announced Sept. 14. "We did get them to put it back," he said.
But in congratulating his merger team for its rapid-fire negotiations, Mr. Thain revealed how many details of the hastily arranged union remain to be addressed. "You have no idea unless you're in the [mergers and acquisitions] business how hard it is to put together a deal from zero, from a standing drop to done, in 48 hours," he said.
A Merrill employee, identifying herself as Janice from Jacksonville, Fla., asked whether the company will proceed with the sale of its Financial Data Service Inc. unit, a Tarzana, Calif. mutual fund administrative services business that Mr. Thain had planned to sell as part of his furious campaign to build capital. "I don't know the answer to that at the moment," he said. "That is something we have to sort out."
Mark from Albuquerque, N.M., asked whether Bank of America will assume Merrill's guarantee of principal on the structured notes it has sold to investors.
"We just put together a $50 billion transaction in the course of 48 hours in the context of Lehman going bankrupt and [American International Group Inc.] doing whatever," Mr. Thain testily responded. "I promise you, we have not gotten to the point of talking about who is going to guarantee structured notes."
Ed from New York asked if Mr. Thain could discuss Merrill's ability to control the wealth management business after the bank takeover and whether it is true that — as some advisers hope and the press has reported — global-wealth-management president Bob McCann will run it.
"Without having any particular discussion about that, the expectation is that Bob will run the wealth management business," Mr. Thain said, adding acidly that Mr. McCann had likely leaked his expected promotion to the press.
A Bank of America spokesman said that it is "premature" to discuss management decisions, and a Merrill spokeswoman declined to comment.
Mr. Thain did disclose two telling details of the acquisition agreement with Bank of America. It gives Merrill the right to continue paying its $1.40 annual per-share dividend until the deal closes, and also has a provision for ensuring that Merrill brokers will be offered some incentives to remain. Mr. Thain said that it is reasonable to assume that absent the deal, Merrill would have cut its dividend.
He also raised a skeptical eyebrow about Bank of America's public assertion that it will realize some $7 billion of annual expense savings through the combination. Mr. Thain said that it was only an estimate, though a rational one, that assumes savings of 10% from the companies' combined expenses last year.
"Given that this thing was done over 48 hours, there's not a much greater degree of precision than that," said Mr. Thain, who prior to joining Merrill engineered the transformation of the New York Stock Exchange from a membership organization to a publicly owned corporation and arranged its merger with Euronext NV of Paris.
When questions hit him about retention packages for brokers and issues such as their ability to call on Bank of America corporate clients in advance of the deal's close, he told them to contact Mr. McCann but added with a lilting edge in his voice: "I'm not going to let Bob get the mike," and "Bob's not happy" about it.
Mr. Thain, a finance chairman for the campaign of Sen. John McCain, R-Ariz., who a friend says has ambitions to work in Washington, kept Mr. McCann on edge throughout the call. At one point, Mr. Thain referred to Mr. McCann as "combined head of this organization," adding with a chuckle: "I didn't say self-proclaimed."
A Merrill spokeswoman declined to comment on the banter.
Mr. Thain, who was president of The Goldman Sachs Group Inc. of New York before jumping to the New York Stock Exchange, underscored throughout the session the value of the deal, though he may have been guilty of some overselling. He repeatedly touted the $50 billion price he had garnered for Merrill shareholders, though the value is likely to change before the January closing since it's an all-stock deal with a fixed share-exchange ratio. By the end of the day on which Mr. Thain talked with brokers, the deal value had plummeted to just under $35 billion, though it had rebounded to about $48 billion as of 12:30 p.m. ET last Friday.
Merrill's credit would have been downgraded without a deal, jeopardizing the firm's future and its shareholders, he said. Even with the deal's announcement, Mr. Thain said, some trading counterparties had backed away from the company. "I'm sure there will be a little bit of a cash draw," he said, "but the fact is that the market realizes this [deal] stabilizes us."
Mr. Thain's reference to Bank of America's pulling its trading line — a sign of apparent concern about Merrill's creditworthiness — also may have been overstated to justify the deal to employees, some observers said. Firms often modify trading authorizations and limits with counterparties in the ordinary course of business, curtailing them and reinstating them without fanfare. "We don't comment on client relationships," a Bank of America spokesman said when told of the statement.
Mr. Thain, who took Merrill's reins just 10 months ago, said the deal came together as he and other Wall Street executives held crisis meetings at the New York Federal Reserve Bank on the night of Sept. 12 and during the day of Sept. 13 in a failed attempt to craft a rescue plan for Lehman Brothers Holdings Inc. of New York. They "knew they were doomed," he said of his Lehman counterparts. "Today, all of their stock is worth zero, and they're all unemployed. I thought to myself, 'Well, we never want to be in that spot.'"
As it turned out, after Lehman filed for bankruptcy protection last Monday, Barclays PLC of London moved in to buy much of its banking business for a relative song, with expectations of job offers to perhaps a third of Lehman's 25,000 employees.
But Mr. Thain said the faces of the Lehman employees that Saturday led him to leave the Fed meeting and call Bank of America chief executive Ken Lewis.
"I wouldn't be doing my job, and the board wouldn't be doing its job, if we turned that offer down," he told the brokers. "I'm not sure what would have happened to us, but I am sure that from a shareholder point of view and from an employee point of view, taking a $50 billion offer ... it was the right answer."
Mr. Thain was nevertheless clearly bitter about the circumstances, and he fingered such ratings agencies as New York-based Moody's Investors Service and Standard & Poor's for Merrill's plight, all but accusing them of dereliction of duty.
"In their infinite inability to have any intellectual rigor to their analysis," the firms have been basing their credit ratings on companies' share prices rather than on careful review of their balance sheets, he said to a loud round of applause. That creates a vicious cycle in which a declining stock price is viewed as a loss of confidence from credit counterparties that then leads to an actual downgrade, "which of course then makes it more difficult with your credit counterparties and harder to raise capital," Mr. Thain said. Hedge funds, knowing how the ratings agencies act, are actively shorting the stocks of Merrill and other financial institutions, he said.
Downgrades earlier this summer required Merrill to put up millions of dollars of additional collateral to support derivatives trades and also push up the cost of raising additional debt.
An S&P spokesman said stock market movements are one of many factors used to determine a company's debt capacity and ability to pay. "It never alone determines rating actions," he said.
A spokesman at Moody's did not return calls for comment.
Toward the end of his call, Mr. Thain was asked how brokers should respond to clients who question the apparent abruptness of Merrill's decision to sign away 94 years of independence.
"You describe it by what's happening in the world," he said. "Lehman Brothers went bankrupt in 48 hours. The environment is very chaotic, very difficult and very dangerous ... AIG not very long ago had a market value of over $100 billion."
Merrill, Mr. Thain concluded, is fortunate in having found a sound partner at a time when major problems persist. "I don't think the system is protected, and I think there are likely to be more difficulties along the line," he said. "Frankly, I don't think that any of the [people at the Department of the] Treasury, Fed or [Securities and Exchange Commission] has a very good answer ... They're trying to figure out what to do ... It's luckily not our problem, but it's a problem to the system."
The Feds made their decisions, of course, at the end of the week. As of last Thursday, however, Merrill and Bank of America had filed their merger contracts with the SEC. The die for Merrill was cast.
E-mail Jed Horowitz at jhorowitz@investmentnews.com.
