Merrill's Bloomberg, Blackrock Stakes Now Nearly a Third of Total Market Cap

Merrill Lynch (MER) was down another 8%+ Friday on news that that the company made improper deals with hedge funds to move mortgage exposure off its balance sheet. Under terms of the purported deals, MER sold commercial paper to hedge funds and guaranteed a minimum return at a later date.

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While guaranteeing a specified return at a later date may sound improper, especially given the underlying assets involved, these types of deals are pitched by Wall Street firms to all types of investors every single day. Often these notes are called Principal Protection Notes whereby an investor gains exposure to a certain asset class and is guaranteed a specified return at a later date. In return for reduced risk however, the investor's potential return is also capped at a certain rate. So at first glance, these types of deals are not necessarily improper.

Where the deals come into question however, is how the company hedges the risk on these notes or accounts for them. Unfortunately, Friday's WSJ article does not provide much in the way of details on this part of the transactions.

Whether or not these deals are proper or not, the market is taking a shoot first and ask questions later approach. Just Friday, MER's market cap declined by nearly $5 billion which is 25% more than the estimated $4 billion value of its stake in Bloomberg.

Another valuable asset of Merrill's is its 49% stake in Blackrock (BLK) which as of Friday was valued at $11.24 billion. Together, these two assets now represent nearly one third of MER's total market cap.

Comments

[Vlad Khandros:]

The Bloomberg stake was value as $5 - $10 billion by a recent Wall Street Journal article. Some believe the stake could fetch as much as $15 billion due to extreme interest from other parties, the respective buyer would be the only holder of Bloomberg besides Bloomberg, and the fact that this globally recognized firm that has not sold a stake in itself in years.

2007 Nov 06 01:08 AM