Thain's New Merrill Lynch

This morning's Wall Street Journal carries a piece by their guest columnists at breakingviewscom entitled "Merrill's Goldman Redux." Sometimes I think those guys might actually read my blog, because they periodically repeat my own themes and conclusions.

Today is one such day.

Back on November 15th, I wrote this post, wherein I opined that John Thain is poised to transform Merrill from the piece of financial services junk it currently is, to a new breed of Goldman Sachs-Blackstone. I wrote, in part,

"My partner and I discussed Thain's move into the Merrill CEO job last night, and agreed that he probably took the job because it will allow him to build something himself. He inherited a senior management post at the already-smoothly functioning Goldman. He transformed the NYSE, but, again, from an already-powerful position.

Perhaps at Merrill, he feels he can retool a company and be credited with the entire value creation job.

My own prediction is likely to be seen as nonsensical. But, here it is. I think there's a significant probability that Thain will simply sell the brokerage business to another firm. Perhaps Wachovia. He could sell it to Citigroup, if it finds a new CEO and can afford the price.

But I think Thain will consider it. First, it doesn't involve firing anyone- simply divesting Merrill of a dead-end business. As I've written elsewhere in this column, who trades with full-price, full-service brokers anymore except older, and/or less sophisticated clients? It's not a business with a future. There's a reason Merrill is the only surviving predominantly retail wire house.

In a world with Fidelity Investments, Vanguard, E*Trade, Scott Trade and Schwab, how many observers of this sector believe that full-service, personal retail brokerage is a business with a profitable, growth-generating future?

I was wrong about Thain taking the Merrill job. But he's a very smart, seasoned, tough manager. I don't think he believes he can take Merrill to where Goldman has been without throwing the retail business over the side.

My partner and I believe that Thain sees an opportunity to recruit top talent to join him in building the next Goldman Sachs or Blackstone. Coming from the NYSE, rather than directly from Goldman, he's probably not operating under any sort of agreement not to poach Goldman employees. None of them, nor Thain, has managed retail brokerage, nor has needed it to become the best-performing investment bank in recent years."

This morning, the breakingviews columnists Mike Prest, Jeff Segal and Robert Cyran echoed my sentiments. They write, in part,

"John Thain, the new Merrill Lynch boss, says he wants the Thundering Herd to be more like Goldman Sachs Group, his old shop. After the trauma of Stan O'Neal's leadership, Merrill certainly needs tighter risk management and a more-collegial culture. But emulating Goldman too slavishly may not be a good idea. It's just as important to recognize where Merrill's competitive advantages lie.

If anyone can bring the Goldman Way to bear on Merrill it should be Mr. Thain, who was co-president and chief operating officer at Goldman. He must be aware, however, that Merrill and Goldman are chalk and cheese. Merrill has been a public company for more than 30 years; Goldman, public since 1999, is still run like a partnership. Merrill has a huge retail brokerage business; Goldman is the consummate institutional firm. Merrill has suffered a near-dictatorship; Goldman's decision-making is collective, sometimes painfully so.

Then there are the shifting sands of time. Every era has its outstanding banks -- the Rothschilds and Barings in the 19th century; J.P. Morgan on Wall Street at the dawn of the 20th; the Warburgs in postwar London. Goldman is the franchise of the moment, but to emulate it now is as futile as copying the Warburgs half a century ago.

Success comes from cultivating one's strengths and learning from rivals. Merrill has a powerful brand, strong distribution through its army of brokers and geographic reach. Mr. Thain should look inward as well as outward for the keys to its recovery."

First, I should state that I'm only partially serious about the breakingviews column following my own themes and positions. At least on this story.

There are really only two options Thain has at Merrill- fix it as is, or transform it. And everybody knows how well Goldman has performed for two decades, so it doesn't take a genius to guess that maybe Thain will tilt his new Merrill in Goldman's direction.

However, my point is still slightly different than that of the Journal's piece. They claim Merrill 'has a powerful brand.' I disagree. I doubt Merrill ever had a 'powerful brand,' other than probably defined by retail market share pre-deregulation of brokerage rates in the US.

Further, the breakingviews trio mention prior dominant financial houses in terms of centuries or decades. Then proceeds to cast Goldman as the 'franchise of the moment.'

I think it's going to be a really long 'moment.'

Let's give Goldman's rise a commencement sometime in the late 1980s. I former officemate of mine at the Wharton Applied Research Center in the late 1970s joined Goldman, rather than McKinsey, and received derisive comments for his choice.

By the time he made partner, from Goldman's Boisi-led M&A group in 1988, the firm had broken onto the Wall Street scene in a big way. So it is probably only in its second decade of equity market dominance. It's reasonable to give it another five to ten years at the top. As it is, Blackstone is arguably an equivalent performing rival now.

So, between the two, as I argued in my cited prior post, you have a target at which Thain would reasonable aim. A firm like that could easily share dominance with Goldman, Blackstone, et.al., for a decade or more.

Merrill, on the other hand, is a wreck. It hasn't been a stellar equity performer for shareholders for a decade, as the nearby Yahoo-sourced chart displays. And it pretty much lost the 1980s, too.

It's shareholder total return performance heyday was clearly 1991-2000, with timeouts in 1993-95 and 1998-99. Meaning about six out of the ten years of that decade.

No, I think it's safe to say Thain will ditch the current form of Merrill, and build a securities sector firm with the best features, in his opinion, of Goldman, Blackstone, and other private equity/hedge fund firms.

Goldman's time is not yet finished as the premier public investment bank. Thain will do well to incorporate large parts of its culture, senior executives, and business mix at Merrill.