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Is bigger better?
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February 14, 2002: 11:12 a.m. ET
So far, Merrill is going it solo. But will a financial behemoth swallow it soon?
By Suzanne Woolley with Amy Feldman
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NEW YORK (Money Magazine) - On the investment banking front, O'Neal has a different headache. The vexing question: Is Merrill's balance sheet large enough to compete with financial giants like J.P. Morgan Chase and Citigroup?
Merrill's total shareholders' equity of $21.1 billion is dwarfed by Citi's equity of $88.4 billion. Citi thus has a key advantage in attracting underwriting business, since it can better afford to lend huge sums to corporate clients. Such financial flexibility has enabled Citigroup and J.P. Morgan to muscle in on lucrative merger-and-acquisition deals, cutting into Merrill's profits. Bryan Paul, an analyst at PNC Advisers, warned, "Citi is chipping away."
Meanwhile, European-based financial giants like UBS Warburg and Credit Suisse First Boston pose an increasing threat abroad. They're well positioned, for example, to grab a big piece of Europe's privatization business, which is likely to generate fat profits in the next few years. And then there are Merrill's traditional foes: Morgan Stanley and Goldman Sachs. Last year in the global M&A business, Merrill trailed both Goldman and Morgan in completed deals.
One option is for Merrill to join forces with another company like Deutsche Bank or allow itself to be swallowed by a Goliath like HSBC. Komansky, who said he wishes that he had 10 bucks for every time a reporter has asked him about a possible merger, parries the question wearily: "As long as the universal banks and other megasize institutions are looking to expand into our business, there's going to be speculation about us. Up until this point in time we've felt we can create more value as an independent organization." If Merrill does decide to go it alone, it will be a survivor, said Michael Holland, a Merrill shareholder and money manager at Holland & Co., "but it will be more challenging than it has ever been."
As for O'Neal, it's hard to imagine him selling Merrill anytime soon -- not until he's had a chance to turn its flab to muscle and drive it to new levels of profitability. It's been a long road from Wedowee to Wall Street. And Stan O'Neal isn't about to surrender the prize.
-Additional reporting by Adrienne Carter 
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