The Merrill Lynch Diet: Starving Shareholders

I thought we were supposed to believe that Merrill Lynch’s (MER) selling a part of its Bloomberg stake and by taking $40 billion of writedowns this year alone, investors were (almost?) out of the woods.

Guess again, news came overnight that Merrill will be selling more than $8 billion in new stock (read, diluting existing shareholders) at preferential terms to the Singaporean buyers of the last slug of stuck Merrill stuffed everyone with.

So, as Roger Ehrenberg asks, “…after all this, is there more to come?”

Let’s get this straight:

CDO book
Bloomberg reports that Merrill is selling its $30+ billion bond portfolio for 1/5 of face value.  I guess that’s better than zero.

New stock offering
A lesson in dollar-cost averaging for Singapore’s Termasek.  Merrill is paying Temasek $2.5 billion to offset losses in Temasek’s previous investment in Merrill and to encourage the fund into putting $3.4 billion more into MER stock.

Bloomberg
According to CEO Thain, Merrill is selling

a controlling stake [in Bloomberg], so we’ll sell more than 51%, but the exact percentage hasn’t been totally determined yet.

What does that mean?  How much more than 51%?  Isn’t selling off that asset better than massively diluting shareholders after a year that has seen MER stock drop over 61%?  Isn’t Bloomberg not even close to being core to what Merrill does anyway?

BlackRock:
Why are we holding on to this non-core asset?  Again, according to Thain:

BlackRock as we’ve always talked about is strategic to us. We in fact with the discussions with BlackRock have broadened and lengthened our distribution agreement with them and we continue to believe that that is a very good and important partnership for us and is working well with us.

I guess what Merrill is saying is that it certainly helps to have a financial relationship with a buy-side firm to help with deal placement and uptake.  This is not particulary inspiring and again, it is hurting the small investors.

The Bloomberg piece quoted above ends with a great quotation:

Why these assets are written down when you’re selling them and weren’t written down in your earnings is a question,” said Ralph Cole, a senior vice president in research at Ferguson Wellman Capital Management Inc. in Portland, Oregon, which oversees $2.7 billion and doesn’t own Merrill shares. “This kind of announcement is surprising and a little disheartening.

I may sound angry, but come on, guys.  I don’t even own the stock but this is the fourth share sale this year and all along, management has said that it has sufficient capital.  This is not a great way to treat existing shareholders, and certainly not enough to engender enough trust to lure new investors off the sidelines.

Disclosure:  The author does not own MER.

Comments

[doublenickel:]

I'm a newby to this whole game, but it seems to me that what Merrill and others are doing in selling newly-issued stock (I assume that's what they're selling) is a precise analogy to the government's "creating liquidity". What Merrill is doing, looks to me to be spending some of their market cap--about 8 billion of the 24 (oops, 23.5...oops, 23...)billion. A little math tells me that after this is over, the share price will be at about 16, assuming nothing else changes, which it will, since existing holders probably will be motivated to do something about their situation. I know this is hopelessly elementary to most of those out there, but it was an "aha" moment for me, and I'm glad of the opportunity to think about it at the keyboard. I welcome any enlightening comments!

2008 Jul 29 09:31 AM

[braddunc:]

As a successful investor for over 25 years, I have been constantly been assaulted by so-called "financial planners" and other stock salesmen from brokerages and banks to turn over the management of my money and holdings to the bozos who, we now know, are responsible for these egregious and outrageous acts of corporate thievery and incompetence.

My Mama, who lived through the Great Depression, always told me that "a fool and his money are soon parted" so I was at least wise enough to resist them but the thing that angered me the most of all was the arrogance and sullenness of their assertions!

2008 Jul 29 12:15 PM

[notsosmart:]

dont believe anybody about anything.think for yourself.in these times of lying,spinning,unethic... & unethical behavior handle your own money & investments.

2008 Jul 30 09:11 PM

[jjason:]

Over the past three or four years, I looked at investment banks and companies that manage money for investors and determined that the firms had one thing in common...they paid dividends to their own shareholders that were very low ( from Zero to 3% yield on an annual basis ).

I asked myself " How can these firms advertise that they can manage my money and give me a decent return on my investment of 8%, in dividends, when they cannot pay their shareholders a decent dividend."

So I did not buy stock in any wall street firms. One of the Best Decisions I made.

2008 Aug 04 11:04 AM