I had a sneaking suspicion when Merrill announced the sale of its sake in Bloomberg for $4.4 billion that the quarterly loss had to be in that range, despite forecasts that the loss would be in the $1.5 to $2 billion range. Bloomberg is too good a business to sell unless there was a pressing need, In this case , it was to fulfill the recent practice for loss making financial firms to report (when possible) capital raising of roughly similar magnitude to the the level of red ink.
Perhaps in an effort to reassure investors further, Merrill also announced its intent Thursday of Financial Data Services, which is hoped to fetch $3.5 billion. One has to wonder at the timing of the announcement. Perhaps I am an outlier, but I find it less rather than more reassuring. It may be a wise bit of insurance against ever further deterioration in the financial markets, but it looks a tad desperate from here.
Similarly, I am no doubt an outlier on the wisdom of Merrill’s decision to view its stake in BlackRock as its most prized asset. Admittedly, data services suffer in downturns too. Bloomberg’s revenues are a function of the number of users, so in a securities industry downturn, revenues, and thus profits, fall. But Bloomberg is an international firm, so the fall in seats in London and the US may be somewhat buffered by more stable demand in Asia (one search firm tells me they have strong demand for financial professionals in Asia).
While BlackRock offers stronger synergies, in a weak market when the future of large investment banks is in question, some measure of diversification might be a wiser bet. Admittedly, one would have to know the cash flow of the two investments to make an informed decision, but betting on the value of synergies does not seem like the highest-value strategy from a pure return standpoint for the next few years, particularly given that BlackRock is strong in fixed income, the area taking the biggest hit.
In addition, Moody’s reduced Merrill’s bond rating one notch to A2 and put the firm’s outlook as stable. Readers can correct me, but I believe that downgrade will not have a serious impact on the investment bank’s funding costs. However, Standard & Poors has the bank at its comparable rating. A, with a negative outlook.
From the Wall Street Journal:
The past continues to haunt Merrill Lynch & Co. Chairman and Chief Executive John Thain.
The brokerage firm’s second-quarter loss of $4.65 billion, or $4.95 a share, was one of the worst in Merrill’s history and more than twice as steep as the loss for which analysts had been bracing. Already clobbered by subprime-related write-downs of more than $30 billion in the previous three quarters ended in March, Merrill took an additional $9.7 billion hit in the second quarter, which caused the bulk of the company’s net loss….
“Merrill is a massive ship to right, and that is not going to be possible in a near-term timetable,” said Meredith Whitney, an analyst at Oppenheimer & Co. “Revenue is going down, expenses can’t go down fast enough, and he is now selling the sofa to pay the rent — and next month it will be the dining-room table.”….
Mr. Thain said in an interview he is frustrated because the firm remains hobbled by the legacy assets it is “lugging” around that continue to fall in value. It isn’t helped, he said, by the fact the decline in value in mortgage assets has been severe over the past six or so months. “The mortgage related assets market is probably gonna continue to decline for some time.”
The results, which compared with earnings of $2.14 billion a year earlier, were worse than the most pessimistic analyst forecast in a survey by Bloomberg.
Chief Executive Officer John Thain cut about 4,200 jobs in the first half of the year and is divesting assets to stem record losses and a 43 percent drop in Merrill’s share price during 2008. The company said it completed a $4.43 billion sale of its stake in Bloomberg LP and plans to sell a controlling interest in Financial Data Services Inc. Merrill’s charges from the credit crisis now exceed $46 billion.
Note this comment from the Bloomberg piece:
Thain, 53, abandoned an effort to sell Merrill’s 49.8 percent share of fund manager BlackRock Inc. In a statement today, BlackRock said the two firms “agreed to extend and strengthen our global distribution agreement.”
So the truth may not be that the synergies with BlackRock are the reason for not selling the stake, but that given the stormy seas in the credit markets, the Merrill interest didn’t look likely to sell at the price the firm had set as its minimum.