Merrill Raises $6.2 Billion

Merrill Lynch made three deals right before Christmas that will bring in $6.2 billion when all is said and done. Singapore-based financial firm Temasek Holdings will buy $4.4 billion of common stock with an option for $600 million more by way of options dated March 28, 2008. Davis Selected Advisors, an American investment firm, will purchase $1.2 billion in Merrill common equity. And GE Capital, the financial unit of General Electric, will buy the bulk of operations from the company's financial arm: Merrill Lynch Capital. Merill just might make it.

Merrill's CEO John Thain, who used to be the boss man over at the New York Stock Exchange, is in need of cash after the brokerage firm suffered huge write-downs stemming from the subprime mortgage meltdown. In third quarter 2007, the firm wrote-down $8 billion and as a result, said good-bye to former CEO Stan O’Neal.

The transactions don’t give the new investors control, but the deals do represent a 13% dilution of equity in Merrill. Better an 87% stake than nothing, though. For stockholders, this was a good deal. Mr. Thain has a big job ahead of him, but he now has the cash needed to execute.

That doesn’t mean the Merrill is out of the woods yet. Indeed, Fitch Ratings is seriously considering a downgrade. This would be in addition to the reduction in the firm’s creditworthiness in October. At issue are the management of risk at Merrill and its appetite for risk versus reward.

What is particularly troubling for those who own Merrill stock is the fact that further write-downs are in the offing. It owns 20% of Bloomberg LP, and that is a very attractive asset. One wouldn’t be surprised to see that for sale before Mr. Thain finishes his second month at Merrill to cover those losses.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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