A mountain of ice and the debris of a ship that has been crushed by it. It is a great tragedy, not a single survivor. ~ German painter Caspar David Friedrich (1774 – 1840)
This breaking news follows on the heels of a New York Times report that O'Neal had angered the Board of Directors by broaching the idea of Merrill merging with Wachovia Corp (WB.N) without first getting his board's approval.
Unlike the British luxury passenger liner RMS Titanic, which sank on April 15, 1912, Stanley O’Neil is no Captain Edward John Smith, who went down with his ship.
The 10Q Detective speculates that O’Neil’s secret talks were motivated more by personal interest than by what was best for all stakeholders.
The Compensation Committee provides a compensation framework that is structured to reward its Named Executive Officers for their contribution to the Company’s financial success. Specifically, bonus compensation is weighted on year-over-year net revenue growth, pre-tax earnings growth, and ROE.
Global financial markets performed well for most of 2006, which translated into the global financial services titan reporting record net earnings of $7.59 per share in fiscal 2006 ending December 31, up 47% from $5.16 in 2005.
Merrill paid to O'Neal, 56, about $48 million last year, when the firm's net revenues increased by 26% to $32.7 billion, pre-tax earnings growth climbed 44% (on an operating basis), and operating ROE grew to 21.6% (nearly twice the Peer Group median increase) from 16.0% in 2005.
However, the 10Q Detective does note that his total compensation included $26.8 million in restricted stock grants, awarded at a fair market value of $95.825 per share.
Beware of the little expenses; a small leak will sink a great ship. ~ Benjamin Franklin (1706 – 1790)
On Wednesday, Merrill Lynch & Co. announced $8.4 billion in write-downs for the third quarter—much larger than those posted by any of the bank's Wall Street competitors—and equaling 14% of its market capitalization (and exceeded its earnings in all of 2006).
Merrill also reported a $2.3 billion loss, the biggest quarterly loss in its history.
Goldman Sachs analyst William Tanona also estimated Merrill Lynch could have a $4.5 billion write-down in the current quarter on its remaining $20.9 billion exposure to collateralized debt obligations and subprime mortgages. He said the market for those securities continues to deteriorate.
Given the third-quarter loss, Merrill's annualized ROE for the first nine months of the year is 6.5%, putting O’Neil’s 2007 bonus in jeopardy. As stated in the company’s 2006 Proxy: “Failure to achieve at least 2005 baseline ROE for any performance year results in the complete forfeiture of the Company match for that year.”
Of interest, too, the Company “does not have agreements with executive officers that provide for severance unless there has been a “Change in Control” of Merrill Lynch.” Accordingly, if O’Neil terminated his employment for any reason and there has not been a “Change in Control,” any severance benefits are at the discretion of the Compensation Committee.
If Wachovia—or any other interested suitor—were to acquire the Company, Mr. O’Neil could receive “Change-in-Control” Severance Payments, Retirement/Insurance Benefit Payments, and (Accelerate) Stock-Based Compensation of $29.5 million, $116,609, and $221.8 million (value assumption was based on $93.10 per share), respectively!
Short of a takeover, Mr. O’Neil—with more than 20-years of service—will still leave a rich man: 1.75 million in unexercised (vested) options, exercise prices between $39.80 - $59.85 per share, $24.8 million in accumulated benefits in his pension plan, and $50.79 million in aggregate balance (at last fiscal year) in a non-qualified deferred compensation plan.
Here's your hat, what's your hurry? ~ Jimmy Stewart (It’s a Wonderful Life, 1946)
Shares in Merrill have fallen by more than 30 percent this year. Those investors who purchased stock near its 52-weak high of $98.68 per share are eagerly lining up to show O’Neil the door.
Editor David J. Phillips does not own shares in any companies mentioned in this column. The 10Q Detective has a Full Disclosure Policy.