DealZone

$87,000 for an area rug?

Would you spend $87,000 on an area rug? Absolutely, if you are John Thain, the former CEO of Merrill Lynch.

Thain refurbished his office at Merrill to tune of $1.22 million in company money, according to a Daily Beast/CNBC report.

Pictures of the rug are as yet unavailable, but in the words of the Big Lebowski, we bet it really tied the room together.

It was a rough day for Thain. Hours after the rug story came out, he was ousted from Bank of America, just three weeks after the Merrill merger closed.

Other extravagant purchases reportedly included:

    A “mahogany pedestal table” ($25,000) A “19th Century Credenza” ($68,000) A “George IV Desk” ($18,000) A chandelier in the private dining room ($13,000) A “parchment waste can” ($1,400)

Why bother

wall-st.jpgThe bloodletting of the third quarter is splattering over Wall St this morning, with grim market conditions taking their toll. Merrill Lynch reported a third-quarter net loss of $7.5 billion on write-downs and credit losses on complex debt securities. The once mighty brokerage last month accepted a takeover bid from Bank of America. It said that the net loss applicable to common shareholders widened to $5.58 per share from $2.3 billion and its loss from continuing operations was $5.56 per share, where analysts were expecting a $5.18 per share short-fall.

It also said revenues, excluding $8.3 billion in interest expenses, were $16 million dollars for the quarter. Seem paltry? Well, it was a big turnaround from the $2.1 billion net revenue loss recorded in the second quarter, but a far cry from the $380 million of net revenue taken in the same quarter a year ago. Contrast this with compensation and benefits expenses, which rose 76 percent to $3.5 billion “primarily due to the reversal of compensation expense accruals in the prior-year quarter”.  

Chief Executive John Thain engineered the speedy sale to Bank of America on the same weekend that Lehman Brothers was forced into bankruptcy, with just a few weeks left in the quarter, so there was plenty of writing on the wall. Did Merrill’s army of sales reps run out of steam trying to convince an investment-wary marketplace to take on risk? Given how grim things have been, they should probably be congratulated on managing positive net revenues at all.

Feeding Frenzy

The German share price index DAX is seen at the Frankfurt stock exchange, October 7, 2008. REUTERS/Kai Pfaffenbach(GERMANY)Banks aren’t lending to each other, but they are buying each other. An interesting by-product of the deals: capital-hungry institutions are raising billions of dollars of fresh capital in a tumbling market.
 
Bank of America said yesterday its tier-one capital ratio would be 7.5 percent in the third quarter, down from 8.25 percent in the second quarter, spurring it to launch a $10 billion share offering and cut its dividend. On a conference call, it said it could raise even more to help manage the purchase of Merrill Lynch. Wells Fargo planned to raise $20 billion to fund its bid for Wachovia, while rival suitor Citigroup aimed to raise $10 billion to buy that bank. Those two are taking a three-day break from a legal battle over who gets what.  
 
If Citigroup loses out on Wachovia, Dan Wilchins points out, it will also miss out on a great chance to raise capital. Citi would likely have a much easier time raising capital to fund its growth than to patch holes on its balance sheet. The bank has raised $50 billion of capital in the last seven months, and its management has consistently said that it has raised more than it expected to need, he reports. But that could all change in a recession, as credit cards, investment banking, and retail brokerage businesses lose customers. 
 
Once the dust settles, ruthlessly diluting shareholders may show itself to have been absolutely necessary, and perhaps even unavoidable. But now with the markets in freefall, it’s more than a little scary. 

Deals of the day:

* Singapore state investor Temasek Holdings kicked off the sale of electricity generator PowerSeraya, in a deal that could fetch around $2.5 billion. To read more, please double click on 

* Icelandic investment firm Exista will sell its near 20 percent stake in Finnish insurer Sampo to reduce liabilities but will keep its other assets, the group said in a statement.

Deal spreads open wide

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Shares of HBOS and Lloyds TSB got a boost this morning in London as it appeared Lloyds was less likely to try to renegotiate its takeover of HBOS. Standard Life Investments, a top investor in Lloyds and HBOS, supports the planned takeover under the original terms, a person close to the investment firm said, and analysts suggested political and regulatory pressure would force the deal through, despite its chunky discount to the indicated offer price.

BBC Business Editor Robert Peston writes:

So if you believe that the terms of the deal won’t and can’t be changed, the current HBOS share price is an opportunity to buy £10 notes for £6.60.

That looks too good to be true. And the normal investing rule is that if it looks too good to be true, then don’t touch it even if you’re in a radiation-proof suit.

Sympathy for the devil’s banker

After a couple weeks of just trying to keep up with developments in the financial crisis, reporters and bloggers are taking halting steps toward describing the mythos of the investment banker.

It’s been a while since Tom Wolfe and Bret Easton Ellis popularized the bespoke-suited arrogance commonly associated with the financial world’s anointed — the easy millions, the casual disdain for the rubes and the marks in the lower classes and the single-minded pursuit of money. Depicting the carnivore in his or her habitat is beginning to come back into vogue as taxpayers who may soon be on the hook to bail out their social betters in the investment banking world wonder why they’re getting stuck with a bill they didn’t incur.

New York magazine ran a story called, “The Rage of the Previously Rich: A Lehman trader copes with the sudden onset of income shrinkage,” featuring this choice nugget:

Not a day for a car show at World Financial Center

Motorexpo New YorkThe timing could have been better for the luxury car show at the World Financial Center in New York, home to Merrill Lynch & Co.

The Motorexpo opened on Monday — the morning after Merrill employees were shocked to hear their company was being bought by Bank of America, marking the end of the storied name in American finance.

Nikki Gold, a promoter for the Motorexpo, handing out brochures at the entrance to Merrill’s headquarters, said “A lot of people are in a really sour mood — the people you expect to take the brochures aren’t taking them.”

Merrill Lynch: The Village People connection

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Unearthed in today’s exhaustive Merrill Lynch coverage: According to the company’s website, Charles Merrill and Edmund Lynch made their fortuitous acquaintance at Manhattan’s 23rd St YMCA in 1907.

Charles E Merrill & Co. opened its doors in January 1914, and the company changed its name to Merrill, Lynch & Co a year later.

The lyrics of the Village People’s anthem, written in 1978, apply just as well to the 22-year-olds Merrill and Lynch as they do today, especially for some of the bank’s employees who seem certain to lose their jobs as Bank of America acquires the firm:

Who’s next and how?

A worker carries a box out of the U.S. investment bank Lehman Brothers in LondonLehman‘s most valuable assets, primarily Neuberger Berman, are still on the block, but becoming less valuable by the hour with the bank having filed for bankruptcy protection. And with Merrill Lynch now heading for the relative safety of Bank of America‘s $50 billion embrace, it’s time ask “Who is next and how?” Most attention is squarely focused on insurer AIG and investment bank Morgan Stanley.

AIG’s shares lost a third of their value in pre-market Monday action. Warren Buffett would be a natural candidate for AIG assets, given it’s a business he knows (and part of being a successful oracle is knowing your businesses).

On Sunday AIG is reported by the New York Times to have approached the Fed seeking $40 billion in short-term financing. An investor call is expected later today.
The Fed might be more willing to play a role in getting AIG sorted out as well, if it sensed a systemic risk to another strut of the financial markets.

In for a penny…

Merrill Lynch CEO John Thain poses before a news conference in MumbaiSingapore’s Temasek made clear how bullish it is on Merrill Lynch in a Bloomberg TV interview, expressing great confidence in CEO John Thain. The news service reported that the Singapore wealth fund has U.S. clearance to raise its stake in the brokerage to as much as 14 percent. That would be worth roughly $1.7 billion on the open market. Though less if they issued new shares, it would certainly help Merrill deal with the $5.7 billion in write-downs it said it would take in the third quarter, and would probably be worth even more as a sign of steady capital support from its biggest share holder.

Such lifelines are likely to keep pumping funds into struggling Western banks, according to a regional executive at one of the world’s biggest institutional money managers. Hon Cheung, regional director of the Official Institutions Group in Asia at State Street Global Advisors said he expects the funds increasingly to adopt passive investment approaches, given the need to move large amounts of money without disrupting markets. “Their purpose is not to support the U.S. taxpayer or the U.S. economy or to ensure stable global markets. If by doing that, they get a side benefit that’s great. But their principal job is to benefit the stakeholders,” said Cheung. And as these sovereign wealth funds aren’t even really beholden to share holders, they may have stomach for even more stunning losses.

Lehman Brothers has asked three private equity firms to remain in the bidding for its asset management arm even though the investment bank has yet decide on whether to sell the unit, the Financial Times reported. Kohlberg Kravis Roberts, Hellman & Friedman and Bain Capital have been told by Lehman that their bids are high enough to go forward, the paper said, citing people familiar with the matter. Although Lehman has not reached a decision, it has been soliciting bids from private equity firms to gauge interest in its asset management arm, which includes Neuberger Berman, the fund manager, and minority stakes in several hedge funds.

Temasek’s strong stomach

temasek2.jpgSingapore wealth fund Temasek may have gotten hold of some bad stuff this year when it bought a 9 percent stake in Merrill Lynch. The stock has lost more than half its value since the purchase was announced in late December. But far from swearing off noxious bank assets, the flush Asian fund says it wants more. And why shouldn’t it? It just doubled its full-year profit by selling assets in local power and its national telecoms and airlines companies, as well by cutting a stake in Bank of China, so the toxicity of Merrill’s share price is not making it sick. Financials grew by two percentage points to 40 percent of its portfolio in the year through March and are likely to grow further, with Temasek saying it expects contagion from the credit crisis to spread. That should keep prices down for a while. Temasek said it will not cap its investments in the sector, but it was mum on whether it was thinking of taking on any Lehman exposure.

India’s largest oil producer ONGC has agreed a 1.4 billion pounds ($2.6 billion) takeover of Russia-focused oil explorer Imperial Energy Corp as it works to secure energy to fuel India’s booming economy. Imperial said ONGC’s overseas arm, ONGC Videsh, would pay 1,250 pence in cash for each of its shares in a deal that could double state-owned ONGC’s proved and probable reserves. This is less than the 1,290 pence approach Imperial said last month it was discussing with an unnamed bidder, which sources close to the matter identified as ONGC. Investors aren’t wholly convinced though, with the shares trading down more than 1 percent this morning after rising sharply in recent weeks on hopes for a bidding war.

Infosys Technologies agreed to buy British consultancy Axon Group for 407 million pounds ($753 million) as India’s second-biggest software services exporter looks for growth beyond an uncertain U.S. market. The cash deal values Axon at six pounds per share, a 19.4 percent premium over Friday’s close of 5.025 pounds and 33 percent over the average price of the last six months, Infosys CEO Kris Gopalakrishnan said. The stock has risen to 611, and Infosys shares have taken a hit as expectations rise another bid will emerge. Altium Securities said in a note it believed there was room for a counterbid closer to 700 pence.