Could Merrill Be Takeover Bait?

A picture is worth a thousand words. And the picture above shows billions of dollars in lost equity for owners of Merrill Lynch stock. The graph traces the price of a share of Merrill's common stock over the past year. If you are a shareholder, you like to see that line move higher from left to right. Merrill's chart is doing just the opposite and is good only for short-sellers, who have sold borrowed shares at a higher price with the intention of buying them back lower.

Regular visitors to this page know that I like to beat up on Merrill. After all, they are the company that sold Maine $20 million worth of toxic commercial paper last summer. Treasurer David Lemoine has since had to write off that entire amount, hoping with fingers crossed that some of that investment is eventually recovered. Meanwhile Merrill, unable to sell more than a fraction of all that risky merchandise that it helped create, has plenty on its own books.

Another investment bank, Bear Stearns, is right now biting the dust. The last remaining order of business is to figure out what the outstanding shares are worth. JPMorgan Chase tried to pull a fast one earlier this month by offering just $2 a share. When angry shareholders speed-dialed their congressmen, the offer was upped on Monday to $10. The very next day Papa Bear Jimmy Cayne, Chairman of the Board, figured that was all the honey he was likely to get, so he dumped all of his 5.6 million shares at a price of $10.84. The proceeds of over $60 million may sound like a lot, but those shares were worth almost $1 billion before credit markets started collapsing in August. Before you start feeling sorry for ol' Jimmy, understand that he was off playing bridge when the run on his bank began. That got him fired as CEO.

The day after Jimmy cashed his chips, rumors were swirling on Wall Street that Lehman Brothers would be the next investment bank to fall. I have a passing interest in Lehman because the CEO, Richard Fuld, was three years ahead of me at Wilbraham Academy. Hopefully Dick has his golden parachute already fabricated and fitted. He has just enough time left to strap it on.

So what about Mother Merrill? This morning Massachusetts Secretary of State William Galvin announced yet another investigation of the firm, this time for the sale of auction-rate securities. "My office has received calls from people who thought they were investing in safe, liquid investments," Galvin said in a statement, "only to find that they had, in fact, purchased auction-market securities that are now frozen, and they cannot get their money out"--exactly what happened with the MaineFail, um, MainSail investment. Meanwhile, back at corporate HQ, the writedowns that began in the third and fourth quarters of 2007 will probably continue for another quarter or two. A falling stock price might entice a foreign buyer, who could touch up those old TV ads proclaiming that Merrill Lynch is bullish on... Brazil?