Merrill Lynch & Co.'s selection Tuesday of E. Stanley O'Neal as president, chief operating officer, and likely eventual successor to chairman and chief executive David H. Komansky shows that for all Merrill's evolution, retail brokerage unquestionably remains its dominant cultural force.
Mr. O'Neal, 49, who has led Merrill's U.S. private client group since February 2000, fills a vacancy that had existed for two years since Herbert Allison left. Mr. Allison's departure was generally viewed as a reaction to the realization that he would not be chosen as the heir to Mr. Komansky.
Mr. Komansky, 62, said that when he retires three years from now, he would recommend Mr. O'Neal to Merrill's board as his successor. Asked why picking his successor took so long, Mr. Komansky, who gave a joint telephone interview with Mr. O'Neal, said: "Clearly it was a process designed to give the candidates as much exposure to other businesses and other assignments and give themselves the ability to excel."
Though Merrill never publicly identified candidates, its list was thought to include three other executives: Jeffrey M. Peek, the head of Merrill's asset management business; Thomas W. Davis, the head of its investment banking business; and Winthrop H. Smith, the head of the international private client business and the son of Merrill's first chairman.
Mr. O'Neal's appointment to head up Merrill's core business of retail brokerage, where he succeeded John "Launny" Steffens, who has also since left the firm, was seen by many observers as a clear indication that he was being groomed for the top job.
Indeed, many on Wall Street believed the race was always Mr. O'Neal's to lose.
"I don't think [the others] were ever really in the fray; money management is a big business for Merrill, but it's not the biggest business either statistically or emotionally," said Dean Eberling, an analyst with Keefe, Bruyette & Woods.
"To lead Merrill you have to have buy-in with the retail brokerage business," said Henry McVey, an equity analyst with Morgan Stanley Dean Witter.
Mr. O'Neal's ascendancy at the nation's biggest broker-dealer comes amid a prolonged downturn in the market that has affected both the retail and institutional business. It also follows what has been a major increase in traditional banking lines such as deposit gathering and business lending at Merrill.
During a conference call after the release of Merrill's second-quarter earnings - profits fell 41%, and the company warned that weak markets left uncertain its outlook for the rest of the year - chief financial officer Thomas H. Patrick fielded questions on whether Merrill had seen fit to use its balance sheet as a way to win underwriting business in a slow new issue market. (See story, page 1.)
On Tuesday Mr. O'Neal said that the balance sheet issue has become prevalent thanks to the slower market. "We have a strong and large balance sheet and have the resources and expertise to compete," he said.
Merrill has used its balance sheet where it makes sense, such as in boosting its convertible securities business, where it now controls 26% of the total market, he said. The company has committed "billions" in capital, he added. However, both Mr. O'Neal and Mr. Komansky stressed Merrill would remain cautious about committing capital going forward and only do so where it made sense.
For the time being, Mr. O'Neal will continue to head up private client business on an interim basis, but he said that Merrill would eventually name someone to that position, most likely tapped from inside the firm.
"I'm looking forward to working with David on every aspect of the business," he said. Mr. O'Neal will work with Mr. Komansky to direct worldwide operations of the company's three primary businesses: corporate and institutional, retail, and investment management. Asked whether he has any major strategic initiatives planned, Mr. O'Neal's quipped, "I think I would probably need a little more than 48 hours to come up with major strategic [initiatives]."
Mr. O'Neal, who joined Merrill from General Motors Corp. in 1986, spent a lot of time prior to running the brokerage on the institutional side heading both investment banking and capital markets and doing a stint as chief financial officer.
He has already been responsible for a number of major decisions at the firm. In July 2000 under his stewardship, Merrill cut 2,000 positions in its retail brokerage unit. And earlier this year Mr. O'Neal unveiled a strategy of segmenting its retail customers, shepherding those with fewer assets away from total reliance on financial advisers and more toward accessing accounts online and over the phone.