NEW YORK – Merrill Lynch & Co. Inc., the No. 1 full-service brokerage, on Wednesday reported its first quarterly loss since 1998 as it took a previously announced $1.7 billion after-tax charge to pay for 9,000 layoffs and branch closings around the world.
Merrill earlier this month said it had expanded too fast, and now is trying to become as lean as its Wall Street rivals. President Stan O'Neal, widely seen as the successor to longtime Chairman David Komansky, is spearheading the firm's wrenching restructuring, which has cut Merrill's work force by about 15,000 jobs, or 21 percent, in the last year.
The job cuts come as the securities industry closes the books on its roughest year since the 1987 stock market crash. The bear market gutted lucrative businesses like fees for new stock offerings and merger advice, and the Sept. 11 attacks devastated Wall Street and plunged the U.S. economy into recession.
Merrill posted a net loss of $1.26 billion, or $1.51 a share -- the first time the brokerage suffered a quarterly loss since it laid off 3,400 workers in 1998. That compared with earnings of $877 million, or 93 cents a share, in last year's fourth quarter. Excluding special charges including costs related to Sept. 11, Merrill earned $491 million, or 51 cents a share, in the latest quarter.
``It looks like, in a lot of the businesses, (Merrill has) reached a bottom,'' said Dave Trone, an analyst at Prudential Securities.
Analysts expected the firm to earn between 46 cents and 50 cents a share, with a consensus estimate of 48 cents, according to market research firm Thomson Financial/First Call.
``Although equity markets showed signs of stabilizing, the fourth quarter operating environment remained challenging,'' Komansky and O'Neal said in a joint statement.
WEAK INVESTMENT BANKING
Total net revenues fell 24 percent, to $4.8 billion.
``The largest single determinant of earnings growth going forward will be the revenue environment,'' Chief Financial Officer Thomas Patrick told investors on a conference call.
Weak investment banking revenues plagued Merrill as the economy prevented companies from pulling the trigger on mergers or stock offerings, traditional cash cows for Wall Street bankers.
Underwriting revenue fell 20 percent, to $538 million and strategic advisory revenue fell 52 percent, to $210 million as the number of mergers and acquisitions declined.
``We are beginning to see equity market activity stabilize, and we expect a pickup in M&A activity, although the revenue impact will likely not come until later this year,'' Patrick said. M&A advisory fees are not collected until a deal is completed, so there is a lag between merger announcements and when an investment bank gets paid.
Before the conference call, analysts thought it was unlikely Merrill would be too upbeat regarding future growth.
``These guys have gone much further than the other (investment banks) in right-sizing the organization for a sustained lower level of business going forward,'' said Reilly Tierney, an analyst at Fox-Pitt, Kelton.
Principal transaction levels fell 53 percent, to $586 million, as Merrill said debt and equity trading revenues fell. Lower interest rates encouraged companies to issue a record amount of debt in 2001 and investors chose to invest in bonds rather than beaten-down stocks.
``It is unlikely that the debt market will be as favorable in 2002, after 11 rate cuts by the Fed in 2001,'' Patrick said.
Individual investors continued to avoid stocks, despite climbing U.S. stock markets during the fourth quarter. Merrill, which has 16,400 brokers and $1.5 trillion in total client assets, reported commission revenue of $1.2 billion, a decline of 23 percent.
Merrill's asset management fees fell to $498 million from $585 million, and portfolio service fees fell to $525 million from $596 million.
To cope with declines across its businesses, Merrill reined in employee pay, as compensation and benefits declined to 48.2 percent of net revenues, compared with 50.4 percent a year ago. Most Wall Street firms target a compensation ratio of around 50 percent.
Merrill is withdrawing its brokerage efforts from several markets abroad, including Canada and South Africa. It also said it was going to shut 20 of its 28 branches in Japan, cutting 1,200 jobs.
The $1.7 billion after-tax, or $2.2 billion pre-tax, charge included $1.2 billion of severance costs for job reductions. It also included $300 million for the write-down of certain technology assets. The company's brokerage group accounted for nearly $1.1 billion of the charge, before taxes.