Thursday, January 31, 2008

Capgemini - Consulting Services - Capital Markets

Capital Markets


Solutions that address today’s problems
and tomorrow’s demands

The Capital Markets industry continues to
be significantly impacted by:
*A rapidly changing business environment,
*The volume and rate of speed in which new
technologies become available

For organizations to remain competitive and
profitable they must adapt to this changing
business climate.

The selection of new technologies and
industry-leading practices (“solutions”), in
conjunction with the timing of such solutions,
will significantly effect an organizations
competitive position.

The winners of tomorrow will have to
answer the following questions:

Which solutions available today are most
relevant to my current business needs?
Which solutions available today are most
relevant to my long-term plans?
How adaptable are the solutions to my
future requirements?

Whether it’s speed of execution, reduced time
to market for new products and offerings or
simply the horsepower required to create new
products and services based on sophisticated
near real-time analytics, speed is a prerequisite
to success.

When considering the following list of industry
trends, speed becomes increasingly more
important, but speed alone is not the answer.

To remain competitive, market participants
must simplify and optimize processes,
adopt the best technologies, accelerate
implementation time, remove or reduce the
complexity, remain flexible to changing needs
and/or demands and realize financial savings
and a greater return on investment dollars.

Added Trading Strategy Complexity—
A wider variety of more complex asset classes
and strategies to manage risk and increase
ROI is driving the need to optimize and
upgrade systems and processes; increased
data warehousing and reporting capabilities;
and front to back trading automation.

Increased Data Volume—The explosion
of derivatives trading is also causing higher
volumes in the underling products driving
the need for better data warehouses,
reporting, and process automation.

Focus on Market and Credit Risk—
This focus is driving the need for realtime
monitoring of market and credit
risk positions to maximize investment
opportunities; and the need for cross-product
credit monitoring and reporting capabilities.

Electronic Trading—Algorithmic trading and
connectivity to multiple liquidity providers
has intensified competition driving stronger
emphasis on best execution, and the need for
accurate and timely market data.

Providing the Right Solutions
for Success

Capgemini is uniquely qualified to be your
long-term strategic partner supporting
mission critical projects that will transform
your business. Our key differentiators are our
relentless focus on positive business results,
our collaborative approach, our global reach,
the domain knowledge of our people and
our world class proven technology delivery
expertise. Our real-world solutions are driven
by our consultants who have extensive
industry experience and knowledge. We use
a balanced team to provide the right mix of
business and technology skills to our clients.

For more information, please contact us at

You can download brochure of Capgemini from

Case Studies

Faster, Better…and Offshore

A Risk Management Case Study

A major Wall Street firm was challenged to build a
better risk monitoring and reporting infrastructure to
keep up with ever-increasing trade volumes.
Capgemini helped our client innovate a risk
monitoring portal for credit, market, and operational
risk across all major asset classes, all from a balanced
offshore model. The project became the first
successful offshoring project at the firm.


Facilitated the application of credit limits on
trading activity

Enabled risk-based margin calculations on an
account basis

Enhanced visibility for monitoring firm-wide
risk down to desk and trader components

Supported development and maintenance with a
1:7 onsite-offshore ratio

Evolving with the Market

A Trading Systems Implementation Case Study

Suffering from an overburdened trading system and
unable to increase trade volumes, a major financial
institution needed to scale adequately across a joint

Credit Derivatives and Interest Rate Derivatives
trading platform.

Capgemini guided this client through a continuous
series of upgrades, custom implementations,
and product extensions to ensure the client could
grow existing business and innovate new
structured products.


Increased trading volume for interest rate and
credit products

Provided new asset class extensions and pricing

Enhanced back-office and general ledger

Provided 24x7 managed support for trading

Held project costs constant while increasing
development and operations

Tuesday, January 29, 2008

The Goldman Sachs Business Principles

Our clients' interests always come first. Our experience shows that if we serve our clients well, our own success will follow.

Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard.

Our goal is to provide superior returns to our shareholders. Profitability is critical to achieving superior returns, building our capital and attracting and keeping our best people. Significant employee stock ownership aligns the interests of our employees and our shareholders.

We take great pride in the professional quality of our work. We have an uncompromising determination to achieve excellence in everything we undertake. Though we may be involved in a wide variety and heavy volume of activity, we would, if it came to a choice, rather be best than biggest.

We stress creativity and imagination in everything we do. While recognizing that the old way may still be the best way, we constantly strive to find a better solution to a client's problems. We pride ourselves on having pioneered many of the practices and techniques that have become standard in the industry.

We make an unusual effort to identify and recruit the very best person for every job. Although our activities are measured in billions of dollars, we select our people one by one. In a service business, we know that without the best people, we cannot be the best firm.

We offer our people the opportunity to move ahead more rapidly than is possible at most other firms. Advancement depends on merit, and we have yet to find the limits to the responsibility our best people are able to assume. For us to be successful, our men and women must reflect the diversity of the communities and cultures in which we operate. That means we must attract, retain and motivate people from many backgrounds and perspectives. Being diverse is not optional; it is what we must be.

We stress teamwork in everything we do. While individual creativity is always encouraged, we have found that team effort often produces the best results. We have no room for those who put their personal interests ahead of the interests of the firm and its clients.

The dedication of our people to the firm and the intense effort they give their jobs are greater than one finds in most other organizations. We think that this is an important part of our success.

We consider our size an asset that we try hard to preserve. We want to be big enough to undertake the largest project that any of our clients could contemplate, yet small enough to maintain the loyalty, intimacy and the esprit de corps that we all treasure and that contribute greatly to our success.

We constantly strive to anticipate the rapidly changing needs of our clients and to develop new services to meet those needs. We know that the world of finance will not stand still and that complacency can lead to extinction.

We regularly receive confidential information as part of our normal client relationships. To breach a confidence or to use confidential information improperly or carelessly would be unthinkable.

Our business is highly competitive, and we aggressively seek to expand our client relationships. However, we must always be fair competitors and must never denigrate other firms.

Integrity and honesty are at the heart of our business. We expect our people to maintain high ethical standards in everything they do, both in their work for the firm and in their personal lives.

Lloyd Blankfein - Current CEO - Goldman Sachs - 2008

Mr. Blankfein cuts an unusual profile for a Wall Street chief. He put himself through Harvard College and Harvard Law School on a combination of scholarships and financial aid. He took a job in a Los Angeles law firm working on tax-related issues for the film industry before detouring his legal career in 1981, joining a relatively obscure commodities trading firm, J. Aron, as a gold salesman. At the time, J. Aron had just been bought by Goldman Sachs.

In 1994, Mr. Blankfein was made co-head of the J. Aron Currencies and Commodities business. In 1997, the year before the markets cracked under Russia's default and the near collapse of the hedge fund Long-Term Capital Management, Goldman's bond trading group was merged with the J. Aron unit to create "FICC" — fixed income, interest rates, currencies and commodities. Mr. Blankfein became co-head of the joint division. By 2002 he was head of all sales and trading.

Goldman has blazed a path in Wall Street by transforming itself from a traditional investment bank that offers big-name corporate clients advice on deals and capital management to a fast-growing investing giant that is willing to make big bets with its own money.

Goldman's growth is increasingly in trading derivatives and commodities, in servicing the ballooning class of hedge funds and private equity firms as well as managing its own hedge funds and investing in pipeline companies, toll roads and golf courses. Mr. Blankfein, 51, who has been president since 2004, has been instrumental in sharpening this focus.

But with change, there is risk. Skeptics naturally abound and some employees and clients wonder whether the strategy is skewing Goldman's long people-focused emphasis on putting the client first.

"There's a trading division culture, there's an investment banking culture and an investment management culture and they are all different. Earleir, the dominant culture used to be investment banking and now the dominant culture is trading, and in the trading business, people are fungible. It's not good or bad, but it's a cultural change.

After 137 years as an independent firm and 7 years as a public company, Goldman Sachs exudes mystique as no other firm does. As finance has globalized and banks have completed their transformation from secretive private partnerships to still largely secretive, bureaucratic public companies, Goldman has retained its intrigue.

Its brand remains the uncontested leader on Wall Street and its breadth is continually reflected in the fact that it frequently experiences conflicts of interest in its deals because it operates in so many businesses in so many parts of the world.

Mr. Blankfein's sharp focus on results has been apparent since 2002, when the trading and principal investments division produced 52 percent of the firm's revenue and earned him a higher salary, $12.7 million, than his boss, Mr. Paulson, who made $9.6 million.

His ascension to the presidency came as Goldman's two co-presidents, John Thain and John Thornton left. In early 2003, Mr. Thornton left to teach in China and by the end of the year, Mr. Thain accepted an offer to run the New York Stock Exchange. Mr. Blankfein was named president.

Unlike Mr. Paulson, who rose through the ranks of Goldman as a banker, Mr. Blankfein has his roots in sales and trading, the more rough and tumble world of Wall Street. Colleagues describe Mr. Blankfein as witty and charismatic. But investment bankers have complained that he does not spend enough time with their clients.

Today, while it remains the top- ranked bank in global and American mergers and acquisitions, power within the firm has clearly shifted to trading, where revenues drive the bottom line. In 2001, investment banking produced 15 percent of revenues and trading and principal investments produced 53 percent. In 2005, investment banking produced 15 percent of the firm's net revenues, and the trading and principal investments group was responsible for 66 percent.

That shift is partly a result of market conditions — investment banking suffered after the technology boom ended and growth in the stock business has slowed, while low interest rates have fueled record buyouts and huge profit opportunities for banks willing to put their capital at risk.

But the strategy has also been decided upon by management committees willing to embrace a culture of taking more risk with its capital. In this arena, Goldman Sachs and Mr. Blankfein have paved the way.

Value at risk, the only available measure of risk for investors, is supposed to measure how much money could potentially be lost in trading positions because of unpredictable markets and measured by some degree of confidence. In November 2000, that figure was $25 million. In the first quarter of 2006, the average was $92 million.

Goldman executives say the firm takes more risk with substantially more permanent capital behind it, and emphasizes that most of the risk it takes is for its clients.

Perhaps the greatest challenge Goldman faces is the conflicts from its various businesses. The bank recently raised a $8.5 billion private equity fund, which it has used to bid on deals with clients, against clients and in deals in which it is advising the potential bidding group. In a series of high-profile deals in London, Goldman was leading consortiums or parts of ones making bids that appeared to be unsolicited for companies like ITV, the British broadcaster; Mitchells & Butler, and Associated British Ports.

Hank Paulson Goldman Sachs CEO Strategy 1999-2006

Excerpts from various articles on Goldman Sachs

March 2002

The balance sheets of universal banks dwarf Goldman's. The largest, Sanford I. Weill's giant Citigroup (C ), has $1 trillion in assets, more than triple Goldman's $312 billion, while J.P. Morgan Chase & Co. has double that amount.

By offering companies a wide range of services, including cheap loans, the behemoths have been attracting profitable investment banking business their way. That's how Citi's Salomon Smith Barney unit clawed its way to become the leading issuer of corporate debt and equity and to hoist itself up the list of top M&A dealmakers.

But Paulson is determined that Goldman will remain a pure-play investment bank.

The core of Paulson's strategy is simple: "We want to be the premier global investment-bank, securities, and investment-management firm," he says. "We want to have a disproportionate share of the business of the most important clients in the most important markets." To achieve that, Paulson believes Goldman must gain a lock on providing financial advice to marquee corporations, government authorities, and superrich individuals in the world's major economies--the U.S., Germany, Britain, Japan, and China. At the same time, the firm wants to add market share in the most profitable securities businesses: mergers, IPOs, equities, and commodities trading, high-yield offerings, and complex financial instruments called derivatives. To do that, Paulson has made targeted acquisitions in these fields to give Goldman greater depth, not breadth.

With a market cap of just $39 billion, vs. Citigroup's $216 billion and J.P. Morgan's $56 billion, Goldman looks like a tasty morsel to predators.

Paulson had spent lavishly on expensive talent and acquisitions at the peak of the market. After Goldman went public in 1999, he behaved as if Goldman were invincible. By mid-2001, Goldman's staff had tripled, to a peak of 25,000, as Paulson added high-priced specialists in everything from M&A and IPOs to investment advice for the superwealthy, junk bonds, and equity trading. And once he had publicly traded shares at his disposal, he went on a buying binge costing well over $7 billion--the first time Goldman had ever made major acquisitions in its then-130-year history. Since July, 1999, it has taken over a specialist share trader, an online investment bank, an options trading outfit, and two market makers. The biggest, costing $6.5 billion, was Spear, Leeds & Kellogg, which trades on all listed U.S. exchanges and over-the-counter markets.

Paulson now switched his focus to pruning costs. Now, say Goldman insiders, the firm is preparing another hefty round of layoffs. Many who survived last year's cuts were bitter because they were asked to accept options instead of cash as a large part of their 2001 bonus. Making matters worse is the so-called partnership compensation pool that Goldman created when it went public in 1999 to protect the status of the firm's upper echelon. The effect has been to create three classes of employees: the old-guard partners, the veterans who never made partner, and a legion of newbies, the 40% of staff who have been on board for two years or less. Some of the newer arrivals were angry that they had to take larger pay cuts than members of the pool at the start of this year. Paulson doesn't have much sympathy for the disgruntled. "We try very hard to be fair. But if people don't like what they got paid, they don't have to work here," he says.

Some are getting the message loud and clear. On Feb. 11, three Goldman sales and trading executives left for Morgan Stanley. Meantime, co-head of investment banking Steven M. "Mac" Heller, a 20-year veteran, is about to retire. Other managing directors who have been hanging on until this May, when they will be able to sell the shares they received in Goldman's IPO, will probably follow him out the door. Since going public, Goldman has lost 6 of its 22 management committee members. But losing even one top exec can prove critical. After head of research Steve Einhorn left in 1998, Goldman's research slipped from No. 2 to No. 7 in the closely watched Institutional Investor rankings. Moreover, 7 of the 13 female partners at the time of the IPO have quit.

It's up to Paulson to prove them right. A lanky and athletic six-footer, he's a complicated man who alternately terrifies and inspires employees. But some employees avoid riding in elevators with him rather than face his probing questions, though they can't escape the voice mails he regularly leaves at 2 a.m. He expects his employees to work as hard as he does: He makes 360 visits a year to executives at top companies.

He emerged as a major player at Goldman in 1994 after he was yanked from the Chicago office to New York as COO, charged with slashing costs 25%. He managed to do that.

Paulson, with the help of his now co-presidents, John A. Thain, 46, and John L. Thornton, 48, run Goldman as a team. Unlike other Wall Street houses, where power struggles are common and very public, the three are considered so close and complementary that employees refer to them in one breath as "Hank, John, and John." While Paulson came up through the ranks as an investment banker, Thain "the Humane" is a trader at heart and makes more operational decisions. Thornton is the group's strategist, who built up the firm's European operations with Thain. The three tag-team decisions on most major transactions, sometimes from different corners of the globe in a typical daily blitz of 50 voicemails. Anything O.K.'d by one is considered approved by all. Occasionally they disagree. If that happens, they may take hours or even days to hammer out a decision in their tight circle. "If we don't agree, we lock ourselves in a room until we come to an agreement," says Thain.

Whether in unison or as individuals, they will have to ensure that employees execute flawlessly. Paulson's nightmare is that an employee may feel too pressured and make a mistake--and put the firm's reputation on the line.

Until three years ago, Goldman groomed its bankers for leadership roles through informal apprenticeships. But with thousands of employees spread around the planet after the hiring splurge, that's no longer possible. So, Goldman is drafting a succession plan that extends down to its division heads. It has also hired management gurus to figure out how its top three officers can best reach their people. One result: Paulson, Thornton, and Thain teach managing directors in a leadership program called Pine Street. "We want people to act as though they've been here for 10 years when they've been here for two," says Lloyd C. Blankfein, a managing director.

So concerned is Paulson that his ambitious strategy might be torpedoed by a screwup that he's at pains to remind staffers of incidents that put the firm in jeopardy. In December, he walked all the managing directors through a litany of past blunders. They included angering Japanese regulators with careless recordkeeping, annoying the Singapore government by advising on a hostile bid where such practices are usually taboo, and advising dot-coms with questionable business plans. Since January, all Goldman employees have been taking refresher courses on everything from the so-called Chinese walls that separate investment bankers from research analysts to appropriate ways to manage risk. On Feb. 19, Goldman announced that it will make its research department independent from its equities division and banned analysts from owning stocks in industries they cover.

Paulson's tactic of deepening Goldman's expertise is starting to pay off in U.S. equities trading, too. Through acquisitions, Goldman has patched together critical mass in everything from self-directed electronic trades to processing and clearing services. In two years, Goldman has gone from making markets in 500 stocks to 6,000. And with the ability to clear its own trades after it bought Spear Leeds, it is now handling transactions and back-office work for more than 600 investment managers with $100 billion in hedge-fund assets, up from nothing two years ago.

That may sound like grunt work, but Paulson argues it will help Goldman to grab more underwriting deals. His reasoning: Companies want the highest prices when they issue equity, so they will flock to the best-informed firm. "The more knowledge we have on what is really going on in the capital markets--the market's pulse--the more insight we can provide investor and issuer clients," says Robert K. Steel, Goldman's head of equities.

Likewise, Goldman's investment management business may be about to pay off. Years in the building, it now spans the globe and offers clients a wide variety of products ranging from fixed income to hedge funds. Division co-head Peter S. Krauss believes he can deliver 40% profit from asset management. While other divisions are cutting staff, Krauss has been training 200 brokers to add to a 500-strong force catering to superwealthy individuals with $20 million or more to invest.

All this positioning should have a big payoff when the economic recovery finally kicks in and mergers and IPOs pick up. And if the rebound is as synchronized around the world as the downturn was, Goldman will benefit more richly than rivals without its heft in Europe and Asia. "Look at what's happening around the world," says Paulson. "The forces of globalization. Restructuring. Open trade. Pension reform. Goldman Sachs operates at the sweet spot of capitalism."

Goldman Sachs - Current Management and Strategy - 2008

Goldman Sachs appoints new top management

Monday, June 19, 2006

Investment banking firm Goldman Sachs Group announced the appointment of Gary Cohn and Jon Winkelried as its co-presidents and chief operating officers.

The New York-based company also appointed John S Weinberg as its vice chairman. Both Cohn and Winkelried will report directly to Lloyd C Blankfein, who is set to replace Henry M Paulson as the company’s Chairman and Chief Executive, when Henry M Paulson’s nomination for the post of US Treasury Secretary is confirmed. Cohn is currently the head of securities trading, while Winkelried is the co-head of the company’s investment banking division. Goldman Sachs indicated that the three executives, Cohn, Winkelried and Weinberg, would work closely with Blankfein in both the formulation and implementation of the firm’s global strategy.

John Weinberg and John Whitehead - Goldman Sachs Strategy

John Weinberg had joined the firm in 1950 and became the chairman of the manaagement committee in 1976. Under his astute guidance, Goldman Sachs became a leader in mergers and acquisitions, purchasing companies like J. Aron in 1981. By the 1980s, Goldman Sachs had steadily built itself up as a merger and acquisition specialist and was ranked among the top ten financial institutions in the US. Goldman Sachs survived the upheaval caused by the 1987 stock market crash and surged ahead.

Stepping Down of Jon Corzine as CEO of Goldman Sachs - Strategic Issues

January 1999

On January 11, 1999 Jon S. Corzine, the leader of Wall Street's most prestigious investment bank, Goldman, Sachs & Co., called clients and regulators to tell them that he was no longer chief executive of Goldman Sachs.

Later that morning, Goldman put out a terse press release, with the news that Corzine ''has decided to relinquish the CEO title.'' He would remain co-chairman to help with the initial public offering of Goldman's stock, which was postponed when the stock market plunged in August and September.

Insiders and competitors felt that Corzine was ousted in a coup within Goldman's all-powerful five-man executive committee. Corzine was forced aside by a troika of senior bankers: his co-chief executive, Henry ''Hank'' M. Paulson Jr.; Goldman's top investment banker, John L. Thornton; and Corzine's protege, Chief Financial Officer John A. Thain.

Paulson, now became Goldman's sole chief executive.

Move toward public ownership has brought to the fore conflicts that generally had remained suppressed. A key example is the split between the trading and investment banking divisions, with their very different cultures in Goldman Sachs. Corzine is a trader. Paulson and Thornton are career investment bankers. Thain is a hybrid, working as both a banker and trader.

Reasons for leadership change

In planning for an IPO, they knew that securities firms focused on stable revenues, including investment banking fees, are accorded higher multiples than those that rely on high-risk trading. But a huge slice of Goldman's earnings come from proprietary trading. An analyst says: 'Embedded in the center of Goldman Sachs is a hedge fund.' No surprise, that Paulson and Thornton, along with Thain, want to put as much of an investment banking face on the firm as possible.

There were trading-related mistakes in 1998. The firm earned near-record pretax profits of almost $3 billion, with a hefty chunk from investment banking. But Goldman's vaunted ability to manage risk took a hit as it lost an estimated $500 million to $1 billion when the market cratered last summer. Corzine took a lead role in the Long-Term Capital Management bailout because of Goldman's own exposure. He bid for the overleveraged hedge fund and then shelled out $300 million for the rescue. And after finally announcing that the firm would go public in June, 1998, Corzine was forced to pull Goldman's offering in September.

There was discontent among the investment bankers. They were unhappy that their lush profits got flushed down the toilet in the bond market fiasco. In mergers and acquisitions, Goldman racked up $960 billion in global deals, which was almost three times its 1997 record total. Still, Goldman's pretax earnings were down 81% in the fourth quarter, while those of rival Morgan Stanley Dean Witter (MWD) were up 6%.

The public issue concerns

Investors penalize firms that depend on proprietary trading because it is so unpredictable, producing huge profits one quarter and huge losses the next. By marketing itself as an investment bank and deemphasizing its proprietary trading prowess, Goldman can sell its stock at a higher price. Investors are willing to pay more for the stock of companies whose earnings come from stable fees from commissions, mutual funds, and underwriting.

As Goldman gets set for the IPO, it may be better to have an investment-banker CEO pitching the firm to investors than one who is a trader. If Jon had to get removed, it was an opportune time. Paulson, a reserved, highly organized Midwesterner, is one of the best bankers in the business. He spent his entire career as a banker until being promoted to chief operating officer in 1994. A Goldman partners admires both by saying, Jon is a brilliant, intuitive leader. But Hank embodies a quality that distinguishes a Goldman banker. His ability to execute is legendary.

Corzine was a natural leader with a low-key style. it was Corzine who stepped into the breach in 1994, when Goldman was struggling with trading losses and the sudden resignation of senior partner Stephen Friedman. Thirty-six other Goldman partners fled, taking their capital with them. Corzine was named chairman, and Paulson was his No. 2, though the two maintained that they enjoyed a partnership in the style of former Goldman chiefs Robert E. Rubin and Stephen Friedman. It was Corzine who stabilized the firm and helped it raise morale and profitability. He also instituted better risk-management procedures.

The experience left Corzine even more deeply convinced that Goldman needed to protect itself from market instability by going public and securing permanent capital--rather than remaining hostage to fickle capital that partners could withdraw. Paulson never embraced the idea. On May 27, the executive committee decided to promote Paulson to co-chairman and co-chief executive, just two weeks before the entire partnership voted to go public. Some insiders and competitors say Paulson's vote was bought--that he was promoted to be Corzine's equal in exchange for supporting the IPO.

Another long-simmering issue between Corzine and the troika was how the IPO process would be handled. Corzine was committed to having about 200 voting managing directors cast ballots on the IPO, since they own the firm. However, Paulson and Thornton believed that this was too unwieldy and time-consuming an approach and that the executive committee should make a decision for the full partnership, say sources close to the firm.

In June, 1998, Corzine did put the issue of the IPO to the full partnership, and it was approved. But the process of Corzine and others circling the globe to meet with Goldman's far-flung partners to win their support for an IPO delayed the offering. After the markets crashed, Goldman was forced to cancel its offering, a major embarrassment to a firm that advises clients on IPOs. It was a humiliating experience for Goldman--an intensely proud institution.

Delaying the IPO may have damaged Goldman's reputation with clients, even though by that time, the firm had little choice. It may just be market sniping, but competitors in London think they detect a falloff in the firm's performance. They say that Goldman's senior investment bankers did not seem to be covering important clients with quite their usual thoroughness. Some sources say that not being chosen to represent BP, a frequent Goldman client, on the $52 billion Amoco deal was a blow. Despite their huge success in M&A everywhere in the world, in the U.S., Goldman has slipped in the IPO rankings from No. 1 in 1997 to No. 3 in 1998, with market share falling from 15.7% to 9.4%, says Securities Data Co.

Goldman Sachs - History and Senior Managers

Goldman Sachs was founded in 1869 by German Jewish immigrant Marcus Goldman.
The company made a name for itself pioneering the use of commercial paper for entrepreneurs.
Goldman joined the New York Stock Exchange in 1896.
Goldman's son-in-law Samuel Sachs joined the firm and the name was changed to Goldman Sachs.
Goldman became a player in the Initial Public Offering market in 1906.
In 1906, it co-managed its first public offering, United Cigar Manufacturers.

The Company Co-Manages Its First IPO in 1906

In 1906, one of the firm's clients, United Cigar Manufacturers, announced its intention to expand. Goldman, Sachs, which had previously provided the company with short-term financing to maintain inventories, advised United Cigar that its capital requirements could best be met by selling shares to the public. Although Goldman, Sachs had never before managed a share offering, it succeeded in marketing $4.5 million worth of United Cigar stock; within one year United Cigar qualified for trading on the New York Stock Exchange.

On the strength of this success, Goldman, Sachs next co-managed Sears Roebuck's initial public offering (IPO) that same year. Henry Goldman was subsequently invited to join the boards of directors of both United Cigar and Sears. The practice of maintaining a Goldman partner on the boards of major clients became a tradition that continues today.

By 1920, underwrote IPOs for B.F. Goodrich and Merck.

It started the practice of recruiting MBA's degrees from leading Business Schools, and the practice still continues today.

In 1930, Sidney Weinberg assumed the role of Senior Partner and increased the role of Goldman in Investment Banking. Goldman was lead advisor on the Ford Motor Company's IPO in 1956. Weinberg also started an Investment Research division and a Municipal Bond department. The firm also started Risk Arbitrage.

Gus Levy joined the firm in the 1950s. He was a well known securities trader and under his leadership trading activity flourished in Goldman. This started a trend at Goldman of investment banking and securities trading competing for influence and power. For most of the 1950s and 1960's, the competition was between Weinberg and Levy. Levy pioneered block trading and the firm established this activity under his guidance. Goldman formed an Investment Banking Division in 1956.

In 1969, Levy took over as Senior Partner from Weinberg. Weinberg retired from the firm. He focused on trading and built Goldman's trading franchise. It is Levy who is credited with Goldman's famous philosophy of being "long term greedy," which implies that as long as money is made over the long term, trading losses in the short term are not to be worried about. Weinberg retired from the firm.

During the 1970s, the firm expanded in several ways.
Under the direction of Senior Partner Stanley R. Miller, it opened its first international office in London in 1970, and created a Private Wealth division along with a Fixed Income division in 1972. It also pioneered the "White Knight" strategy of takeover defense in 1974 during its attempts to defend Electric Storage Battery against a hostile takeover bid from International Nickel and Goldman's rival Morgan Stanley. It pledged to no longer participate in hostile takeovers.

John Weingberg and John C. Whitehead (Co-Senior Partners)

John Weinberg (the son of Sidney Weinberg), and John C. Whitehead assumed roles of Co-Senior Partners in 1976. White is an MBA grad from HBS. They established the 14 Business Principles of Goldman Sachs.

The principles are in the post

The firm acquired J. Aron & Company, a commodities trading firm which merged with the Fixed Income division to become known as Fixed Income, Currencies, and Commodities. J. Aron was a major player in the coffee and gold markets.

The current CEO of Goldman, Lloyd Blankfein, joined the firm as a result of this merger. (More about Blankfein in

In 1985 it underwrote the public offering of the Real Estate Investment Trust that owned Rockefeller Center, then the largest REIT offering in history. The firm got into facilitating the global privatization movement by advising companies that were spinning off from their parent governments. It happened in various european countries.

In 1986, the firm formed Goldman Sachs Asset Management, which manages the majority of its mutual funds and hedge funds today.

In 1986, it joined the London and Tokyo stock exchanges and became the first United States investment bank to rank in the top 10 of Mergers and Acquisitions in the United Kingdom. During the 1980s the firm became the first bank to distribute its investment research electronically and pioneered the first public offering of original issue deep-discount bond.

Robert Rubin and Stephen Friedman (Co-senior partnership)

Robert Rubin and Stephen Friedman assumed the Co-senior partnership in 1990 and pledged to focus on globalization of the firm.

Under their leadership reign, the firm introduced paperless trading to the New York Stock exchange and lead-managed the first-ever global debt offering by a U.S. corporation.

It launched the Goldman Sachs Commodity Index (GSCI) and opened a Beijing office in 1994.

In 1994 Jon Corzine assumed leadership of the firm following the departure of Rubin and Friedman.
The firm joined David Rockefeller and partners in a 50-50 join ownership of Rockefeller Center during 1994.
In 1998, it acted as a global coordinator of the NTT DoCoMo IPO.

In 1999, Corzine stepped down as CEO. (More about the circumstances

In 1999, Henry Paulson took over as Senior Partner.

One of the landmark in the firm's history is its decision to public and its own IPO was made in 1999. The decision to go public was a tough one that went through many arguments and debates. Finally, Goldman decided to go public and to offer a small portion of the equity to the public. Around 48% is held by the famed partnership pool. 22% of the company is held by non-partner employees, and 18% is held by retired Goldman partners and two longtime investors. This leaves approximately 12% of the company for the public.

Henry Paulson became Chairman and Chief Executive Officer of the firm.

Hull Trading Company, one of the world’s premier market-making firms, was acquired by Goldman in 1999 for $531 million.

It acquired Spear, Leeds, & Kellogg, one of the largest specialist firms on the New York Stock Exchange, for $6.3 billion in September 2000.

It merged with JBWere, the Australian investment bank.
It opened a full-service broker-dealer in Brazil.

Heny Paulson joined Bush Administration. Blankfein took over as Chairman and CEO.

Subprime crisis did not affect Goldman Sachs in 2007.

In May 2006, Henry Paulson left the firm to serve as U.S. Treasury Secretary, and Lloyd Blankfein was promoted to Chairman and Chief Executive Officer.

As of 2006, Goldman Sachs employed 26,467 people worldwide.
Goldman Sachs is divided into three core businesses.
Investment banking
Investment Banking is divided into two divisions and includes Financial Advisory (mergers and acquisitions, investitures, corporate defense activities, restructurings and spin-offs) and Underwriting (public offerings and private placements of equity, equity-related and debt instruments).

Trading and Principal Investments is the largest of the three core segments, and is the company's profit center. The segment is divided into three divisions and includes Fixed Income, Currency and Commodities (trading in interest rate and credit products, mortgage-backed securities and loans, currencies and commodities, structured and derivative products), Equities (trading in equities, equity-related products, equity derivatives, structured products and executing client trades in equities, options, and Futures contracts on world markets), and Principal Investments (merchant banking investments and funds).
Trading includes market making to a large extent.

Asset management and securities services

It is separated into two divisions, and includes Asset Management, which provides large institutions and very wealthy individuals with investment advisory, financial planning services, and the management of mutual funds, as well as the so-called alternative investments (hedge funds, funds of funds, infrastructure funds, real estate funds, and private equity funds). The Securities Services division provides prime brokerage, financing services, and securities lending to mutual funds, hedge funds, pension funds, foundations, and High net worth individuals.

Sources and References

Monday, January 28, 2008

Merrill's loss for the full year 2007

The five biggest U.S. securities firms, which also include Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., reported a net total of $10.2 billion in losses for the year 2007.

The loss dropped Merrill's ``book value'' -- what's left after assets are subtracted from liabilities -- to $29.37 per share, down from $41.35 at the end of last year. The share price is about 1.7 times book value with the possibility to go to about 1.5 times book value, closer to where peers are priced.

The company's full-year loss was $7.78 billion compared with record net income of $11.6 billion at Goldman, the biggest U.S. securities firm by market value, and earnings of $3.2 billion posted by Morgan Stanley, the industry's No. 2 firm.

Merrill, the third-biggest U.S. securities firm, fell 42 percent last year in NYSE trading, the third-worst performance among the 12 stocks tracked by the Amex Securities Broker/Dealer Index. Goldman, which profited by betting on a decline in prices for mortgage securities, gained 7.9 percent in the same period.

Merrill, whose market value was greater than Goldman as recently as 2006, is now worth half as much.

Merrill eliminated about 1,000 jobs in the fourth quarter of 2007, most of them at San Jose, California-based First Franklin.

Merrill's 1989 net loss of $213 million, under then-CEO William Schreyer, was the first since the firm went public in 1971. That loss works out to about $350 million in 2007 dollars.

Donald Regan CEO Strategy at Merrill Lynch 1971

Donald T. Regan (a Harvard degree holder) became C.E.O. in 1971. He managed Merrill for the consequences of May Day, 1975, when the Government abolished fixed commissions on stock sales, sparking cut-throat competition in the brokerage business. The changes wrought by the iron-willed chairman are still felt at Merrill and through the industry.

Regan fathered the Cash Management Account, or C.M.A., which combined the characteristics of a debit card, money market checking account and brokerage account.

He also led Merrill on its first major diversification drive. He envisioned the company as a ''three-legged stool'' supported by businesses in the securities, insurance and real estate industries.

Merrill would offer customers one-stop shopping for all their financial needs, and relieve the company's dependence on the cyclical brokerage business.

To establish the investment banking division, Regan tapped Schreyer, who had run the Government securities business and the New York branches, a very visible post. The division, later to be Capital Markets, encompassed underwriting, mergers and acquisition services and institutional sales, trading and research; it did not achieve critical mass until 1978 when Merrill acquired the old-line investment banking firm of White, Weld & Company.

Still, retail commissions continued to provide the lion's share of Merrill's revenues.

Don Regan had eased Merrill's brokers into the brave new world of financial services; Bill Schreyer accelerated the process. The time had passed when a broker could spend his day simply dispensing market wisdom (mostly provided by his research department) and booking buy-and-sell orders. Brokers were to be known as ''financial consultants,'' and they were expected to learn how to sell the new products, including life insurance and mutual funds, into which Schreyer was pouring Merrill's money.

The old-fashioned customer's man had trouble adapting to the asset-management strategy, and Merrill is still developing approaches to cope with this problem. The selling skills and knowledge a broker needs in daily contact with customers are very different from those called on to book a single order for a life insurance policy or to persuade a customer to set up a trust. ''I think it's very difficult to be good at all these areas at once,'' says Ronald E. Vioni, a veteran Merrill broker. The company has adjusted its hiring and training policies to develop a cadre of new-look brokers, and has dispatched 200 so-called ''specialists'' to the branches to help sell the non-securities products.

Merrill's target customer has at least $50,000 in household income. By the year 2000, with the baby boomers at their top earning capacity, the number of households above the $50,000 level is expected to double, as is the total of their assets. Something to shoot for, but will the asset-management strategy carry Merrill to its profit goals?

Newyork Times, June 10, 1990

Merrill Lynch - Schreyer's Role

Donald T. Regan, became C.E.O. in 1971. In 1975, the Government abolished fixed commissions on stock sales, sparking cut-throat competition in the brokerage business.

Regan fathered the Cash Management Account, or C.M.A., which combined the characteristics of a debit card, money market checking account and brokerage account.

He also led Merrill on its first major diversification drive. He envisioned the company as a ''three-legged stool'' supported by businesses in the securities, insurance and real estate industries. Merrill would offer customers one-stop shopping for all their financial needs, and relieve the company's dependence on the cyclical brokerage business.

To establish the investment banking division, Regan tapped Schreyer, who had run the Government securities business and the New York branches, a very visible post. The division, later to be Capital Markets, encompassed underwriting, mergers and acquisition services and institutional sales, trading and research; it did not achieve critical mass until 1978 when Merrill acquired the old-line investment banking firm of White, Weld & Company.

Cost control problem at Merrill Lynch

Retail brokerage commissions continued to provide the lion's share of Merrill's revenues, and the brokers' expansive outlook prevailed: As long as the commissions kept rolling in, financial controls could take a back seat.

In 1981, Roger E. Birk, who had come up through the operations side of the business, succeeded Regan, who became Secretary of the Treasury. Schreyer was named C.E.O. three years later. By that time, the costs of Merrill's expansion into real estate, capital markets and insurance had mounted dramatically.

Additional Training for Brokers

Don Regan had eased Merrill's brokers into the brave new world of financial services; Bill Schreyer accelerated the process. The time had passed when a broker could spend his day simply dispensing market wisdom (mostly provided by his research department) and booking buy-and-sell orders. Brokers were to be known as ''financial consultants,'' and they were expected to learn how to sell the new products, including life insurance and mutual funds, into which Schreyer was pouring Merrill's money.

The old-fashioned customer's man had trouble adapting to the asset-management strategy, and Merrill is still developing approaches to cope with this problem. The selling skills and knowledge a broker needs in daily contact with customers are very different from those called on to book a single order for a life insurance policy or to persuade a customer to set up a trust. The company has adjusted its hiring and training policies to develop a cadre of new-look brokers, and has dispatched 200 so-called ''specialists'' to the branches to help sell the non-securities products.

Merrill's target customer has at least $50,000 in household income. By the year 2000, with the baby boomers at their top earning capacity, the number of households above the $50,000 level is expected to double, as is the total of their assets. Something to shoot for, but will the asset-management strategy carry Merrill to its profit goals?

Scheyer's investment banking aim

One afternoon in 1979, while Donald Regan still held sway at Merrill, Bill Schreyer shared a Manhattan taxicab ride uptown with John C. Whitehead, then co-chairman of the management committee of Goldman, Sachs & Company, a powerhouse of investment banking. At one point, Schreyer recalls, Whitehead asked, ''Why don't you just be satisfied with being the largest co-manager of securities offerings?'' As Schreyer recalls, ''I said, 'First of all, that wouldn't be any fun. Second, that's not what we want to be.' ''

What Schreyer and Merrill wanted to be was No. 1. In the brokerage business, that argument had much to recommend it: Large number of brokers and larger volume generates more commission income. But the investment banking business was different. The richest margins went to firms that had long-standing relationships with the nation's major corporations. How could the giant broker break into the club now?

Merrill's answer: sheer financial muscle and experience. Says Tully. ''We did not have the school ties; we did not have 200 years of experience. We therefore had to show municipalities and governments and institutions around the world that we were a factor.''

From a standing start in 1976, Merrill has bolted to the top of the debt and stock underwriting tables, winning first place in 8 of the 11 underwriting categories tracked by IDD Information Services in 1988. It has been the No. 1 underwriter of all securities, worldwide, for two years in a row.

Underwriting is the traditional bread-and-butter of investment banking, and Merrill, with its massive distribution system, has an advantage. But competition has trimmed underwriting profits over the years, and the immediate prospects for richer margins are limited. When the volume of all stocks and bonds underwritten last year fell by 15 percent, fee revenues declined 21 percent.

Investment bankers also fought for a piece of what is potentially the most profitable corner of investment banking, mergers and acquisitions. Corporations traditionally give such plum advisory assignments to their trustedlongtime banking associates. But in the takeover frenzy of the past decade, many companies were willing to join hands with any trustworthy stranger who could rescue them - Merrill Lynch, for example.

Merrill became a pioneer in 1980's-style merchant banking, putting up its own capital to facilitate takeovers. These temporary ''bridge loans'' would eventually be replaced with junk bonds and other debt, also provided by Merrill. Sometimes the firm made equity investments as well. Merrill's huge capital base provided a potent competitive weapon. Merrill became a player in some of the largest and most lucrative leveraged buyouts, from the $4.23 billionBorg-Warner deal to the $25 billion RJR Nabisco bonanza. Investment banking revenues soared from $720 million in 1985 to $1.1 billion last year.

Early Relations with Buyout groups

The firm's strongest relationships are with financial engineers and buyout groups, such as Kohlberg, Kravis, Roberts & Company. Their activities have markedly dwindled of late. Teh Capital Markets group of Merrill Lynch still lacks the close ties to many C.E.O.'s of major corporations. Despite the lack of relationships, M. & A. business is being procured through own capital of ML.

Loss in trading in 1987

In 1987, a lapse in managerial control in the trading of mortgage-backed securities left Merrill with a $377 million loss, an event Schreyer once referred to as ''my Chernobyl.'' Howard A. Rubin, a senior trader whom Merrill had lured away from Salomon by tripling his salary, took a risky position with an exotic derivative of a mortgage-backed security. Initially, the firm knew about the position, and deemed it 'tolerable.' Then Rubin increased his bet, but failed to disclose the new position immediately.

When Rubin's action was learned, traders and salesmen started trying to unwind the firm's position discreetly by selling the securities to customers. But very quickly, a group of executives led by Jerry Kenney, head of the Capital Markets group, and Tully, took control of the situation. First they tried to hedge the firm's position, with little success. Then they began canvassing other dealers in the securities for possible buyers. Kenney called Alan C. Greenberg, the chairman of Bear Stearns & Company, who agreed to buy a big chunk at a bargain-basement price. Merrill dismissed Rubin;

London Market Push

Along with dozens of American investment bankers, Merrill wanted to be on hand in force for Big Bang - the deregulation of London's financial markets in October 1986. But few spent so grandly as Merrill. And when the foreigners began to suffer - because they were unfamiliar with the operations of the local markets and the intense competition - few hurt more than Merrill.

Merrill has now withdrawn completely from the European commercial paper and gilts markets, and cut its trading in European equities. In addition, the company has been consolidating its facilities in London and Zurich with a new strategy for London office. It is focusing on debt and equity underwriting and advisory work, particularly on so-called cross-border transactions - mergers and acquisitions, for example, that involve companies in different countries. Merrill wants to be ready for the economic integration of Europe in 1992.

Cost Control Efforts

During the six years since Bill Schreyer took over the reins, he has repeatedly talked of his determination to control costs. Yet total expenses, 92.3 percent of net revenues in 1985, actually increased to 94.6 percent for 1989 - excluding the special $470 million charge.

But Merrill is in fact taking a harder line on costs. Schreyer's Merristroika restructuring is basically a hard-nosed review of each business unit and its budget. The units are placed in one of three categories: 'special situations,' which need to be nurtured; 'core businesses' and 'burden of proof' businesses with poor returns. Merrill says that it can now confidently calculate each unit's return on equity which gives the ability to manage by analysis rather than by gut reaction.

Merrill has sold off a portion of Broadcort Capital Corporation, a securities clearance operation, thus trimming 300 employees from Merrill's books. Its Canadian brokerage operation, with 800 people, has also been sold. In fact, since 1987 Merrill has reduced its head count by 8,000.

Schreyer's focus on profitability, and his decision to subject his company to a $470 million writedown, are signs that Merrill may be changing. What remains to be seen is whether a man so shaped by the old culture can fully embrace the rigors of the new.

June 10, 1990

Sunday, January 27, 2008

Diversity Strategy, Programs and Marketing - Merrill Lynch

Merrill-lynch's diversity program is described in detail in 5 pages in this document. The program was started in 2001

Consultant for Business Growth - Nexus Partners

Nexus Partners worked with Merrill Lynch in the area of Business Growth

Nexus Partners has worked successfully with clients from startups to Global 50 companies, helping them strategically grow their companies and successfully execute new initiatives to meet their most critical goals. We have founded and run early stage companies, managed divisions of large corporations, and held executive positions at Fortune 50 companies. At Nexus Partners we use this experience to partner with our clients to help them to be successful.

Steve Adelman
Steve Adelman is the founding manager of Nexus Partners. He focuses on the development of business and corporate growth strategies for Nexus Partners' technology and financial services clients.

Steve has been a leader and an advisor to growing high technology and financial services companies for over twenty years. His expertise includes business and financial models, go-to-market strategies, partnerships, and strategic investments. Contact Steve

Advisory Responsibilities
Steve develops business and corporate growth strategies for clients, helping them define realistic business goals, create programs to achieve them and determine appropriate metrics to evaluate success. He helps clients create and execute their go-to-market efforts, strategic partnership programs, financial and technology investment strategies, and helps build and manage corporate teams to drive the new strategies to successful execution.

Experience Base
Steve’s current and past companies and clients include American Express, Hitachi, Merrill Lynch, Novell, Palm, Reuters, the U.S. Secret Service and numerous startups. Steve is currently an advisor to Mocana and JobFlash.

Steve is an adjunct professor in the Entrepreneurship Program in the School of Business and Management at the University of San Francisco.

In the non-profit sector, Steve is involved with the Cupertino Educational Endowment Foundation, is the leader of the Northwest YMCA Trailblazers a father and child organization, and is a Board Member of the Fairbrae Swim and Racquet Club.

Nexus Partners specializes in tackling complex business questions where a myriad of market, technology and operational issues must be assessed and transformed into winning results. We focus on helping companies get results in the following areas:
• Growth Strategies
• New Initiatives
• Partnerships
• Bridging Technology and Financial Services

Case Study: Merrill Lynch
Accomplishment: Developed strategy to attract new, younger clients

In the mid '90's Merrill Lynch, the "Thundering Herd" of the brokerage industry, was confronted with a new type of competition: the Internet and online brokers. The team brought in to assist with this dilemma, managed by Nexus Partner's Steve Adelman, quickly determined that the average age of a Merrill Lynch customer had gone up every year by a year for the past decade, and at that point their average age was in the mid-50's.

The first order of business was to create a strategy for Merrill Lynch to approach and acquire younger, Internet-savvy clients, while acknowledging and respecting its reputation and culture as the investment firm with the world's largest number of brokers. Merrill Lynch was, and remains known for "bringing Wall Street to Main Street" with its army of brokers who personally manage their client relationships. In addition, it was a requirement to understand and work within existing infrastructure and processes.

The team mapped the entire process flow of acquiring and maintaining a client. This map, created with the input of hundreds of Merrill Lynch employees, ended up being three feet tall by 30 feet long. Based on the information gathered in the creation of the map, as well as interviews with numerous clients, clients of competitor firms, and primary research, the team made a number of recommendations to the leadership of Merrill Lynch on how it could acquire and hold younger clients, without turning its back on its core clientele or its strong broker-based culture.

As a result of these findings and recommendations, including $500 million identified in incremental revenues and cost savings, Merrill Lynch created a new division - "Next Generation," which was tasked with developing a service offering for new, younger customers. Merrill Lynch today has a full range of internet-based tools and educational materials that supplement its brokers, and remains one of the largest wealth management firms world-wide.

Nexus Partners is located in the heart of Silicon Valley, near the intersections of 280 and 85.

We are best reached by email at:

You can also reach us via regular mail at:
1684 Kitchener Drive
Sunnyvale, CA 94087

Or by telephone: 408 306-7049

Technology Initiatives and Innovations at Merrill Lynch

Technology at Merrill Lynch

In 1997, the NASDAQ marketplace began an evolution unparalleled in its history. The surge in electronic trading created an escalating number of investors and increased number of transactions. For Merrill Lynch, to ensure that investors received “Best Execution” on their orders required an increasing commitment to sophisticated technology solutions.

According to George Lawlor, a Managing Director in U.S. Equities at Merrill Lynch, “ This extremely fast moving and complex new business environment meant we had to introduce change into our systems. For Merrill Lynch, it was no longer acceptable to analyze a small statistical sample of our order flow. As part of our strong commitment to our clients, we wanted to look at every single order, every single day, for Best Execution. Given that statistical analysis could not support us any longer, we embarked on a mission to use automation to enhance our performance. We decided to create the industry’s premier Best Execution system.”

Merrill Lynch selected Mantas to build its Best Execution Analysis and Monitoring System (BEAMS). The goal of this system was to monitor execution quality with an electronic audit of trades executed at Merrill Lynch. It was also to order flow sent to other broker dealers. With BEAMS, Merrill Lynch has certainly been able to improve its execution quality. But there are other benefits that the company didn’t originally envision that are now coming to fruition. “One benefit is that BEAMS has proven to be a good diagnostic tool for our technologists,”explains Lawlor. “The other is that the BEAMS Best Execution scorecards are becoming a significant marketing tool for us.”

Despite this edge, Merrill Lynch has still to adapt fully to the onslaught of technology. While discount brokerages such as Charles Schwab have been successfully transitioning to the Internet, Merrill Lynch is still struggling with the business strategy and competitive issues posed by the Internet and online trading. The company realizes the competitive threat that the Internet poses to its existing business model of delivering investment information, investment recommendations, and stock transactions through its brokers. Thus it has already created a unit called Merrill Lynch Online that provides online access to Merrill Lynch’s research reports. However this website is only accessible to its high net-worth clients, and not to Merrill Lynch’s entire customer base of retail investors. Merrill Lynch is also testing a website called where guests can create a watch list of stocks, and pull up full text research reports that are covered by Merrill Lynch stock analysts.

While it is coping with the Internet enabled challenges, Merrill Lynch has continued to invest in sustaining innovations such as its Trusted Global Advisor (TGA) system. The TGA system, which cost over $800 million in development, is designed to deliver “advice, customized research, Financial planning, and asset allocation” to its clients. Merrill Lynch believes that it can successfully integrate its TGA system with its Merrill Lynch Online offering. However, it remains to be seen whether Merrill Lynch can successfully integrate a sustaining innovation with a disruptive innovation.

Merrill Lynch was built on relentless client focus and that is still true today. That is the company’s value proposition. With this as the focus, Merrill Lynch continues to move ahead in its stated goal: “To build on their rich heritage of industry leadership and establish a foundation from which the company can continue to invest for growth in revenues and profits while producing strong, consistent financial performance; attracting and retaining top talent; and, above all, add more value to every client relationship by meeting a broader array of client needs and innovating and executing winning strategies on their behalf.” Merrill demonstrated these fundamentals when it renewed its investment research through collaborative teams across diverse fields.

This optimism is reflected by Stanley O’Neal, Merrill Lynch’s Chairman and CEO: “We finished 2005 at Merrill Lynch on a very strong note, with a compelling revenue performance and record earnings for the full year. Our performance underscores the increasing overall strength and balance of our franchise, which is the result of the investments we have been making throughout the company in people, technology and addon acquisitions. We expect continued investment in our businesses to enhance our prospects for additional, profitable growth in the coming years.”

Stan Oneal Betting on Risky Ventures

Stan O'Neal is criticized as autocratic in 2007 after his resignation. He also took big risks. But his behaviour was documented in the media even earlier.

May 2003
Business Week

O'Neal, 51, is utterly objective about what needs to be done, and he does it -- however painful it might be.

Merril in some probleme due to the cloud of scandals in Wall Street. It will cost Merrill $280 million to settle charges, which it neither admitted nor denied, that it misled investors and helped Enron Corp. cook its books. Federal courts ruled in January that fancy tax-avoidance schemes it sold to clients such as American Home Products, now called Wyeth Corp., were illegal. And it is facing investor suits that could cost it billions.

Dealmaking is at a low ebb, and stock market investors are trading-shy in the worst bear market since the Great Depression.

So what's O'Neal doing in this crisis? In the five months that he has been ceo, he has dragged Merrill through a big cultural change. O'Neal, openly sneers at the old, comfy "Mother Merrill" culture that tolerated bumbling performance by long-serving execs. In its place, he has established a Darwinian code that encourages managers to take risks and gives them six months to a year to show they can succeed -- or get out. Profit makers get rewarded, not those who just pile up revenues. Cost control is in.

O'Neal's management style is a lot more autocratic than that of retiring Chairman David H. Komansky and his predecessors. Already, O'Neal, who has been effectively in control for over a year, has sidelined the sprawling and ponderous executive management committee that once ruled the roost. The operating committee that replaced it is so shrouded in secrecy that even some senior managers don't know exactly who's on it. Insiders say it appears to be mainly a rubber stamp for the torrent of decisions that pours forth from a tightly knit Politburo consisting of O'Neal and three die-hard loyalists: Executive Vice-Chairman Thomas H. Patrick; Arshad R. Zakaria, president for global markets and investment banking; and cfo Ahmass L. Fakahany.

Now, as he steps into Komansky's shoes as chairman on Apr. 28, O'Neal is putting the firm's future on the line with a huge and risky bet that propels it into head-to-head competition with even greater swaths of the financial industry O'Neal told investors in January that he aims to build "a new kind of financial-services firm" that redefines Wall Street by offering a far greater range of services, but with far fewer people and an unrelenting focus on profitability. He aims to capture most of his wealthy corporate and private clients' business. "We believe that it is no longer necessary for our clients to maintain a relationship with any other financial-services provider," O'Neal told investors.

Essentially, he wants to create a financial-services colossus that has both the breadth of a megabank such as Sandy Weill's Citigroup Inc. and the depth -- and trading muscle -- of an independent investment bank such as Goldman, Sachs & Co. He is looking to grab a bigger share of his clients' wallets with services such as checking accounts and mortgages. Because Merrill has a worldwide network of 670 retail offices, most extra revenues from them should drop straight to the bottom line. And he is courting super-rich investors, those with at least $10 million, more assiduously than ever. He's offering them white-glove services while banishing clients with less than $100,000 to two call centers.

What's more, armed with a war chest of $103 billion in capital -- more than either Goldman or Morgan Stanley -- Merrill can greatly ramp up trading of securities on its own account. That's a big change. Although Merrill underwrites lots of corporate and municipal debt, historically, it has left most of the gravy from trading it on the plate for others. Also, O'Neal is making substantial investments in commercial real estate while developing his own hedge-funds-of-funds.

That means, of course, O'Neal is charging into highly competitive areas. Most banks and brokers are eager to recruit rich individuals as customers. For instance, Charles Schwab & Co. bought New York's U.S. Trust Corp. in 2000 precisely with that goal in mind. But Merrill starts with a huge advantage: In 2002, over 60% of its clients' assets were in accounts of $1 million or more and 27% in those with $10 million-plus.

At least one part of O'Neal's vision -- operating with a drastically slimmed-down roster -- is largely realized. Since 2000, when O'Neal took over the retail business, Merrill has axed 22,000 people, or 31% of the payroll, many of them from its famed "thundering herd" of brokers. Some 6,600 are gone because they served customers with small portfolios who are now handled by 460 agents at the call centers.

The carnage had a huge cost in terms of lost business, but it worked wonders for the bottom line. In 2002, revenues slumped 28%, to $28 billion. Angry investors pulled a net $5 billion from their accounts in the first quarter this year, the first fall in five years. However, according to internal forecasts, Merrill was careening toward a $1.6 billion operating loss in what turned out to be the third year of the bear market. Instead, O'Neal delivered the firm's third-biggest operating profits, which translated into a fourfold jump in net profits, to $2.5 billion, as rivals such as Morgan Stanley and J.P. Morgan Chase saw their earnings wilt. He even managed to top archrival Goldman's $2.1 billion in net profits.

The cost-cutting elixir still seems to be working. In the first quarter, Merrill's earnings were up 27% from the final quarter of last year, coming in at 72 cents per share, 11 cents more than Wall Street analysts expected. Better yet, pretax profit margins perked up sharply, to 20.2% in 2002, from 6.3% the previous year, while return on equity nearly quadrupled, to 11.7% from 2.7%. The result: The stock has jumped 47%, to nearly 42 since hitting a 52-week low last October, nearly triple the 17% rise in the Standard & Poor's 500-stock index. And more analysts rate it a buy than any other investment bank besides Citigroup.

Still, critics contend O'Neal's strategy is flawed. They charge that Merrill's cutbacks are so severe that the firm will be left floundering once the market recovers.

Others say O'Neal is failing to deliver on some key promises he made to shareholders. The CEO said the firm would quit unprofitable lines. But it has remained the top underwriter of short-term debt, a low margin business. Rivals say the firm is chasing revenues to get to the top of the underwriters' rankings. Merrill insists they are no longer a concern.

His detractors shouldn't underestimate O'Neal. Bright he may be, but according to some who've worked closely with him, O'Neal often comes across as insensitive in dealing with people. Stories about his high-handed treatment of colleagues abound. For example, when he became president (and CEO-in-waiting) in 2001, he was far from a gracious victor. One of the losers, Jeffrey M. Peek, then-head of asset management, found out that he didn't figure in O'Neal's future plans.

Eventually, his lack of people smarts may come back to haunt him. Already, 10 senior execs have exited since O'Neal officially became CEO in December, including Robert J. McCann, who retired at age 44 in January after working at Merrill for 21 years. That was just 15 months after O'Neal handpicked him to clean up Merrill's research mess as head of research.

A far bigger preoccupation for O'Neal seems to be that reforms in the wake of the Wall Street scandals have gone too far. "Today's business landscape is dominated by an atmosphere of cynicism and potential retribution; the message seems to be that risk is bad," he told the Greenlining Institute, a minority communities lobby group, in Los Angeles on Apr. 10. "If we attempt to eliminate risk, the result will be, ultimately, economic stagnation or perhaps even economic failure."

So far, the risks O'Neal has taken have given Merrill positive momentum. To maintain it, he must build new high-margin franchises. That's what he's trying to do in Phase II of his top-to-bottom makeover. As he pushes into new businesses or bulks up to critical mass in existing ones, he's starting to hire on a selective basis. In the past 12 months, more than 400 bankers, salespeople, and traders have joined Merrill. The firm has doubled the staff that provides technological support and financing to hedge funds, a business dominated by Morgan Stanley and Bear, Stearns & Co.

In the retail business, O'Neal's battle plan requires remorseless segmentation of customers to ensure that serving them is profitable. That's why those with low account balances were diverted, much to their resentment, to impersonal call centers. Few clients with less than $100,000 in assets generate enough fees to cover the $1,500 that industry mavens say it costs Merrill to assign an investor a personal broker. The more affluent clients, especially if they use Merrill for other services in addition to brokerage, are moneymakers for the firm. Merrill estimates that this group has about $140 billion on deposit with other financial firms. It wants them to shift that cash -- and roll over their 401(k) pension plans when they change jobs -- into Merrill accounts.

The richest clients are the biggest prize of all. Not only do $10 million-plus accounts spin off substantial fees, they're also the natural market for high-margin investment products. Last year, Merrill clients invested $3.1 billion in its hedge-funds-of-funds and private-equity investments combined. O'Neal wants that to rise substantially, along with sales of sophisticated financial products such as futures and exchange-traded funds and fancy derivatives. He is determined to coddle the very rich as much as necessary to keep current clients loyal and win over new ones.

Before O'Neal can convince the rich that Merrill's fancy new funds are worth buying, he still may have to give its plain-vanilla mutual funds another shot in the arm. Since Merrill started to merge funds to bury the dogs, more than half are beating the average 3-year performance for their category. A key but hard-nosed group -- outside financial advisers to whom Merrill would like to sell its funds -- are starting to take notice. On Apr. 21, Jersey City (N.J.) clearinghouse Pershing LLC said it would give the 850 brokerages it serves access to Merrill's mutual funds.
Efforts to expand in investment banking are already paying off. First-quarter revenues shot up 37%, to $2.5 billion, thanks to nearly doubled debt-trading revenues. Operating profits from the sector rose 41%, to $785 million. The firm is also making inroads into so-called block trading to get closer to corporate customers and money managers. It buys large blocks of stocks from companies such as Bank of New York Co., as it did in January, and then sells them to investors. It can lose money if prices move against it while the stocks are still on its books. But it's worth the risk: Banks can make returns on equity of 20% or more, vs. the typical single-digit returns from stock and bond underwriting.

Lending more to favored clients is on the rise as well. In 2002, Merrill granted loans totaling $35 billion, an 80% jump over the previous year, and made commitments to lend another $24 billion, a 60% increase. In this way, O'Neal is taking on power hitters such as Citigroup, Deutsche Bank, and Bank of America by extending credit to win more lucrative jobs from corporations.

Pension rollovers, complex derivatives plays, block trades: How does O'Neal hope to accomplish all this as well as keep his core franchises humming? He's drilling his mantra of discipline, discipline, discipline as far down the ranks as he can. He is also streamlining decision-making by combining divisions and dumping co-heads. On Dec. 3, the firm fused its international and domestic retail-brokerage operations.

Pressure to cut costs is still intense. O'Neal has created special SWAT teams in each business group to sniff out ways to use everything from people to computers and office space better. "[They're] coming up with ideas that involve consolidation or dismantling of processes that are redundant or don't add value," says CFO Fakahany.

For now, O'Neal seems determined to tune out such problems and focus on producing the numbers he needs to declare victory. He outsmarted rivals by anticipating the seriousness of the downturn -- and cutting costs -- much earlier than they did. Now, the big question is whether he can outmaneuver them again when business on Wall Street finally picks up.

The diverse portfolio of businesses he has put in place is designed to enable Merrill both to weather a continuing bear market and benefit from an economic upswing. But that won't do him much good if he fails to win back investors' trust and gain the loyalty of his troops.

November 2005 Announcement

In November 2005, Merrill Lynch’s chief executive, E. Stanley O’Neal, told investors that the brokerage firm would shift its strategy and would become more aggressive investing its own money.

The strategy, Mr. O’Neal said at the time, would “not in any material way add to the risk profile of our firm.”

Two years later, the bill for the strategy has come due. Risk, it turns out, can carry a hefty price.

Merrill Lynch said yesterday that it would take a $7.9 billion write-down because of its exposure to collateralized debt obligations, complex debt instruments and subprime mortgages. A result is a $2.3 billion loss, the largest in the firm’s history. The loss raised questions about Mr. O’Neal’s leadership and most crucially the ability of his top executives to manage the risky assets on the firm’s balance sheet.

History Modern Merrill Lynch

In 1940 Merrill Lynch, E. A. Pierce & Cassatt opened its doors, dropping the comma between Merrill and Lynch for the first time and adding Cassatt, a Philadelphia firm that had sold part of its business to Pierce and part to Merrill, Lynch in 1935.
The new firm was devoted to the research and education. The Clients were urged to research their financial options, and Merrill Lynch saw itself as a partner in that process, even providing educational materials.

In 1941 the firm merged again to become Merrill Lynch, Pierce, Fenner & Beane as it absorbed Fenner & Beane, a New Orleans company that was the nation's largest commodities house and the second-largest "wire house" (an investment firm that depended on its private telegraph wires for a broad-based business).
Throughout the bull market of the postwar period and the 1950s, Merrill Lynch continued to be an innovator and a popularizer of financial information. The firm erected a permanent Investment Information Center in Grand Central Station, distributed educational brochures, ran ads with titles like "What Everybody Ought to Know About This Stock and Bond Business," and even sponsored investment seminars for women. These new ideas made Merrill Lynch the best-known investment firm of the day.

Due to the various innovations introduced by him, Charles Merrill's reputation soared to such heights that shortly before his death in 1956 one Wall Street historian referred to him as "the first authentically great man produced by the financial markets in 50 years."
In 1958 the firm’s name changed again. Beane’s name was dropped, and as Winthrop Smith had taken over as directing partner two years earlier, the firm was renamed Merrill Lynch, Pierce, Fenner & Smith (ML). The next year it became the first large Wall Street firm to incorporate. In 1959, earnings reached a record high of $13 million.
During the 1960s the company began to diversify and expand internationally. In 1964 Merrill Lynch entered the government-securities business when it acquired C. J. Devine, the nation's largest and most prestigious specialist in that market. Over the course of the decade the firm also entered the fields of real estate financing, asset management, and economic consulting, and added 20 new overseas offices. The company paid special attention to establishing a European presence, which allowed participation in the developing Eurobond market.

In 1964 had succeeded in becoming the first U.S. securities firm in Japan. In that same year ML was named lead underwriter for the $100 million public offering of Comsat, builder of the world's first telecommunications satellite, thus solidifying its position as one of the USA’s major investment-banking firms. The company underwrote the sale of Howard Hughes's TWA stock in 1965, and in the next ten years added significant new business with firms such as Commonwealth Edison, Fruehauf, and Arco. By the end of the decade Merrill was managing about $2 billion annually in such offerings.
A 1966 debenture issue for Douglas Aircraft, led to an investigation by the Securities and Exchange Commission (SEC) and a substantial rewriting of the regulations governing full-service investment firms like ML. SEC took the opportunity to tighten its rules regarding insider trading and the prevention of unwarranted intraoffice disclosures.
Net income in 1967 was $55 million, representing an increase of 300 percent during the previous eight years.

In 1968, Donald T. Regan was named president of Merrill Lynch, and two years later he became chairman and CEO. Regan guided ML in an ambitious program of diversification aimed at making the company a "one-stop investment and estate-planning institution." This included ML's first determined entry into the real estate field with the 1968 acquisition of Hubbard, Westervelt & Motteley, enabling it to offer to customers a range of mortgages, leasebacks, and other options; a major move into the mutual fund markets; and the purchase of Royal Securities Corporation of Canada, significantly strengthening ML's position in that country.
The firm also absorbed the New York Stock Exchange's fifth-largest brokerage house, Goodbody & Company, in 1970. The company fell victim to Wall Street's so-called "paper crunch disaster." Overextended trading houses were generating more transaction records than their accounting departments could keep up with, resulting, in the case of Goodbody and many others, in massive confusion and eventual collapse. ML acquired the firm at the end of 1970. The bailout cost little and brought ML new expertise in the area of unit trusts and options trading.
In 1971 Merrill Lynch became the second member of the New York Stock Exchange to invite public ownership of its shares, and in July of that year became the first to have its own shares traded there. Shortly thereafter, the company adopted its most recent change of name, forming a holding company called Merrill Lynch & Co., Inc., with Merrill Lynch, Pierce, Fenner & Smith as its principal subsidiary.

Regan's diversification program continued with a 1972 move into international banking. London-based Brown-Shipley Ltd. soon became Merrill Lynch International Bank, and in 1974 ML acquired the Family Life Insurance Company of Seattle, Washington. In 1976 ML formulated a strategy to meet the challenge of the increasingly complex international financial marketplace by offering "a diversified array of securities, insurance, banking, tax, money management, financing, and financial counseling."

Formerly clear demarcations between the various money professions were rapidly blurring. ML demonstrated it in 1977 when it announced the creation of the Cash Management Account (CMA). This unique account allowed individual investors to write checks and make Visa charges against their money market funds. Banks mounted a number of legal campaigns to stop it, to no avail. By 1989, fully half of ML's $304 billion in customer accounts were placed in CMAs, and most of the other leading brokerage houses had developed similar integrated-investment vehicles.

Despite its sustained attempt to achieve a steady level of profit through diversification, ML's earnings have reflected the volatile nature of its core securities business. For example, 1971 profit reached a new high of $70 million, but was followed by the difficult oil-embargo years of 1972--74; and while 1975's record $100 million was not equaled for several years afterward, 1980 saw record highs of $218 million in profit and $3 billion in revenues.
In 1980, U.S. President Ronald Reagan named Donald T. Regan secretary of the treasury and later made him White House chief of staff.
Roger Birk became the company's new chairman and CEO, followed in 1984 by William A. Schreyer.

Schreyer, unhappy with ML's failure to match the earnings of some of its more flamboyant competitors, made increased profitability his chief goal. To that end, Schreyer reorganized the vast company, strengthened its trading, underwriting, and merger and acquisition departments, and made a $1 billion move into new offices in the World Financial Center. The firm also cut spiraling operating costs and trimmed 2,500 employees from its ranks.
In 1985 ML met a longstanding goal when it became one of the first six foreign companies to join the Tokyo Stock Exchange. The following year, when the firm became a member of the London Exchange, ML was able to offer round-the-clock trading.
In 1986 ML sold its real estate brokerage unit as part of Schreyer's plan to unload low-profit concerns so that the company could focus more on using its powerful retail divisions to sell the securities its investment-banking department brought in. The strategy worked; profits increased to a record $453 million during that year.
Also in 1986, scandal hit when Leslie Roberts, a 23-year-old Merrill Lynch broker, was arrested by the FBI for mail fraud. Roberts's complex fraud scheme lost huge sums, as much as $10 million from a single investor's account. The Roberts case typified for many the money fever of pre-crash Wall Street, and the incident attracted international attention.
Then in April 1987, the company was caught speculating in hugely unsuccessful fashion when it lost $377 million trading mortgage-backed securities--the largest one-day, one-company trading loss in Wall Street history.

Coupled with the crash of October 1987, profits were sent reeling and ML was forced to freeze salaries, cut bonuses, dismiss employees, and slash commission payouts to its sales force.
But profits increased dramatically the next year 1988, reaching a record high of $463 million. During 1988 ML achieved a long-held goal when it edged out Salomon Brothers to become the largest underwriter in America. In 1989, ML reached another peak: the firm became the world leader in debt and equity securities, this time besting First Boston Corporation in the race for the top spot. Merrill Lynch was active in merger-and-acquisition business as well. It earned $90 million for helping put together the $25 billion leveraged buyout of RJR Nabisco Inc. that year.
Although Merrill Lynch's revenue and assets under management grew steadily from 1988 to 1990, its return on equity continued to lag behind other firms in the industry. Observers in particular cited the company's traditional inability to control costs. Schreyer embarked on an ambitious reorganization which created 18 operating divisions, the managers of which were accountable for all costs therein. ML also downsized, reducing its head count from 48,000 in 1989 to 37,000 in 1991 and eliminating unprofitable subsidiaries such as Merrill Lynch Realty, Inc. and its clearing service Broadcort Capital Corp. It made additional cuts in its non-U.S. operations. Schreyer's overall cost-containment program paid off by reducing costs $400 million dollars from 1989 to 1991.

Perhaps most importantly, however, Schreyer changed the mind-set of the company from an obsession with generating revenue to a focus on earning profits. Compensation programs tied to the production of revenue were scrapped to make room for new schemes based on return on equity (ROE). Schreyer set an overall company goal of 15 percent ROE, and held ML divisions to this standard as well. As a result, Merrill Lynch's ROE figures improved dramatically in the early 1990s--5.8 percent in 1990, 20.8 percent in 1991, 22 percent in 1992, and 27.3 percent in 1993. This achievement came along with growth. From 1990 to 1993, gross revenues increased from $11.15 billion to $16.59 billion, while assets under management increased from $110 billion to $161 billion. In the midst of this success, Schreyer retired in 1993.
Daniel P. Tully became Chairman and CEO, who had been president and COO till that time.
By 1994 ML had perhaps achieved a long-held goal of diversification to such a degree that it could achieve an average ROE of 15 percent across business cycles. Other firms in the industry struggled in 1994 as a series of U.S. Federal Reserve interest rate hikes battered the bond market and reduced underwriting dramatically. Merrill Lynch--though its profits were down significantly in the second, third, and fourth quarters--still managed a ROE of 18.6 percent for the year on record gross revenues of $18.23 billion. Since the company had the ability to offer its customers a full range of financial services and investment opportunities, it could generate revenues--and profits--in all types of market environments. ML's continuing growth in the global market--highlighted in 1994 by its first-time leadership in Eurobond and global bond underwriting--also promised to help the firm overcome downturns in the economies of individual countries or regions.

Orange County, California, was forced to file for bankruptcy late in 1994 after losing nearly $2 billion in a $7.6 billion county investment fund. Throughout the 1990s, the Orange County treasurer had leveraged the fund in order to purchase securities that would increase sharply if interest rates fell. The scheme worked very well until the 1994 Federal Reserve rate hikes sent the fund's securities into a tailspin. The county subsequently sued ML for $2 billion, claiming that the firm had advised the treasurer to make investments that exceeded state-mandated limits on risk. Merrill Lynch denied that it had done anything wrong, and claimed that it had not been the treasurer's financial adviser.
In mid-1995 Merrill Lynch became the largest investment bank in the world in terms of equity sales, trading, and research through its acquisition of England's biggest independent securities firm, Smith New Court PLC. Merrill Lynch paid $842 million for the purchase. It not only increased its presence in England but also gained businesses in several countries where it had none, such as South Africa, Malaysia, and Thailand. The acquisition thus brought further geographic diversification to Merrill Lynch's operations.;-Co-Inc-Company-History.html

Friedman, Jon, "The Remaking of Merrill Lynch," Business Week, July 17, 1989, pp. 122--25.
Hecht, Henry, ed., A Legacy of Leadership: Merrill Lynch 1885--1985, New York: Merrill Lynch, 1985, 151 p.
Regan, Donald T., The Merrill Lynch Story, New York: Newcomen Society in North America, 1981, 22 p.

Saturday, January 26, 2008

David Komansky - Merrill Lynch - Strategy 1998

I am doing an effort to collect material to understand the strategies followed by various investment banks in their journey to preeminent positions. Interviews that CEOs gave at various points of time, and writeups on the companies are valuable sources for compiling the material needed for such an understanding.

The following are summaries of relevant excerpts from an interview with David Komansky CEO of Merrill Lynch in Chief Executive in March 1998.

March 1998

Recent conditions have been ideal for Merrill Lynch in its push to become a global financial brand.

The securities industry enjoyed unparalleled profits in 1997. According to the Securities Industry Association, pretax income hit $12 billion, surpassing the previous year's record of $11.3 billion. For Merrill Lynch & Co., earnings reached a record $1.9 billion, up 18 percent from the $1.6 billion reported in 1996. Recorded total revenues of $31.7 billion were attained in commissions, principal transactions, investment banking, asset management, anti portfolio service fees. Merrill Lynch is the first brokerage firm to have more than $1 trillion in customer assets.

When David H. Komansky, 58, succeeded Daniel Tully as CEO last year, he inherited a financial services firm at the top of its form in most of the markets in which it operates. The company is the world's largest underwriter of both debt and equity, the leading U.S. M&A advisor, and it ranks just behind Goldman Sachs and Morgan Stanley in the rest of the world (see league tables). In the fourth quarter last year, Merrill Lynch became the No. 1 firm in trading volume in Japan and Australia; not bad, considering the firm's last venture into Japan ended with its leaving with its tail between its legs. Merrill's $5.2 billion takeover of the U.K.'s Mercury Asset Management has catapulted it into the fifth largest fund manager in the world. The move, although expensive, parries attempts by Salomon Smith Barney and Morgan Stanley Dean Witter, Discover to imitate its strategy to service the lousiness needs of both individual and institutional investors.

Merrill is also considering whether to pick up pieces of the failed Yamaichi Securities Co. Ltd., and set up a fully independent brokerage unit in Japan. It's not hard to see why the company has its eye on global markets, but as a marketer of financial services to the middle class, the firm is not as well known outside the U.S.

In 1981, Komansky became a regional director, and four years later, he was named president of the company's real estate subsidiary. It was the successful divestiture of this subsidiary - before the real estate market tanked - that brought him to the attention of senior management. But it was his astute management in leading the company through the calamitous bond market in 1994, when he was in charge of debt and equity, that earned him a shot at the top.

Komansky’s successful divestiture of real estate subsidiary - before the real estate market tanked - brought him to the attention of senior management. His astute management in leading the company through the calamitous bond market in 1994, when he was in charge of debt and equity, earned him a shot at the top.

In 1998, Komansky is finding that the world is changing. The industry is consolidating at an increasingly rapid rate. The recent merger of Union Bank of Switzerland with Swiss Bank Corp. to form the United Bank of Switzerland, with $600 billion in assets, stretching over more countries and lines of business than any other competitor, indicates the titanic scale of the struggle ahead. Advances in computing and communications technology may disintermediate middlemen who relied on their own knowledge to match buyers and sellers. Firms such as Axa of France and Fidelity and Schwab of the U.S., are trying to attract Merrill's Main Street customers. Some people express a fear that due to the size, Merrill may become the AT&T of financial services.

Komansky is confident that Merrill will share to be one of the leaders when the smoke clears. "We have the talent and client relationships to get there," he says. "There's more to this business than just size and capital."

The difficulties of the year: So this year could be a more difficult year. A lot of it is being played out right now with the Asian currency crisis. Analysts have predicted increased volatility for investment banks overall, New entrants are forcing their way into the market, such as commercial banks in the U.S. They put exceedingly strong pressure on margins, particularly on the capital markets side.

On the private client's side of the business alternate delivery systems - such as direct access distribution systems – are taking hold in certain segments of the market, their single biggest weapon is cost and they're able to express that weapon and put pressure on pricing. So, in the domestic markets, there is a lot of pressure on pricing. And margins have eroded to some extent over the last five years.

On the other hand, on a geographical excursion, there is an a fairly optimistic picture of the potentials that exist in almost every part of the world for the industry. Merrill Lynch took that point of view seven or eight years ago to embark on the program of expanding internationally to the point that, today, Merrill has the biggest footprint outside the U.S - second to Citicorp - of any financial services firm. So, margin pressure is there in the States; however, there is a lot of opportunity with less pressure outside the U.S., whether it be in the mature markets of Europe or emerging markets in other parts of the world.

Komansky said “We have what I think is a very sophisticated strategic planning process within the firm for growing our business. It's a constantly updated model where we identify our strategic gaps and then determine whether we have filled those gaps by organic growth or whether we have to pursue an acquisition to do it.
Commeting on the acquisitinof Mercury Asset Management, komansky emphasized that they had a glaring weakness in the asset management business in that everything was in U.S.-dollar-based products. Extensive operations in other countries around the world, have an equal capability in the non-dollar arena. But because, in order to grow that organically, it would have taken between five and seven years with enormous expense; and the riks of missing the market is there, Merrill had the opportunity to acquire Mercury, which was one of the Cadillac names of the business and acquired it.

Regarding adverse press comments on the deal, Komansky commented, the press had the same observations several years ago when we bought Smith New Court - probably was one of the most successful acquisitions ever made on Wall Street. The press proved to be wrong. Mercury will also prove to be a spectacular platform for the growth that Merrill envisions.
He said , we hardly consider ourselves foreigners in London. We've been there for a long time. I believe we're the largest securities firm in the U.K. From the point of view of revenues and profits, we're probably 97 percent or 98 percent European in staffing there, including all of senior management.

While we have paid top dollar, we think the opportunity is very palpable, and much greater for us than it might have been for someone else because we have these businesses in 40 countries around the world. We have ready-made waiting and wanting distribution channels in many of these countries to use their products to develop new products. And clearly, we have great expectations of Mercury as we do for every part of our organization. We intend to encourage Mercury to behave as they have in the past as an independent money manager, and, at the same time, we hope to assimilate them into the Merrill Lynch culture.

In the Merrill culture, the entity is more important than the individual; We do consider ourselves to be an organization where the whole is more important than the individual. For many years, we have stridently avoided encouraging the star system. At the same time, one must recognize that we are a factory of talent. We have people in this organization who are as talented, if not more so, than any other organization on the Street. We manage to find a way to nurture and reward these people so that they not only enjoy working here but they flourish and enjoy being part of the culture that Merrill Lynch represents.

As you look over the horizon you'll find several levels of organizations. You'll find organizations in the financial services business, whether it be investment banking, securities brokerage, insurance, commercial banking. You'll find six to 10 truly global competitors, people who have true global reach, size, scale, and capability - and we intend to be one of those. You'll see the development of monolithic organizations that will get bigger in order to have a product offering broad enough to fit the financial needs of both the global institutional marketplace and the global individual marketplace.
By the same token, there will still be room for a firm that says it wants to be the finest investment bank in the U.S. or the finest commercial or private bank in France. But I don't think the marketplace will afford the profit opportunity for the number of organizations and the amount of capital that is chasing a finite amount of revenue. That's the pressure I see, or the reason you'll see a lot of this consolidation.

We intend to compete on a global scale. That's the strategy we set out for ourselves. Our strategy differs from some of our competitors in that while we compete on a global platform in the capital markets and investment banking arena, we're also competitive in the domestic markets in those countries where we see an opportunity. It's a somewhat risky strategy and quite expensive, but we think the payoff is enormous.
We think, for example, the private client/private banking business has enormous possibilities for us all around the world as the demographics continue to change, as wealth continues to be created, as savings become more important, as pension schemes change.

Merrill planned for 50 percent international revenues by 2000, but that may not l happen, particularly now with the growth in Asia going to be slower than anticipated. But over a period of time, strategy is to get at least 50 percent and then higher international revenue.

With European, Europe is bound to lead to a building of much more competitive industry, lower taxes, and lower tariff rates - and make Europe in general more competitive with American industry than it is today. The EU will cause American companies to have to be that much more effective and efficient to compete.

Opportunities and chllenges for Merrill Lynch: It will generate an enormous amount of consolidation. Our advisory practices are very busy and will continue that way for a long period of time. There will be a big need for capital because of it. Our trading businesses will become very interesting because today we trade securities in all of these different currencies; all of a sudden, you'll be basically one currency denominated. So, that might simplify some of the technology that's called for. But of course, the size of the market will be huge, and any time something happens that stimulates economic growth, it stimulates opportunity for our industry.

We see ourselves in a position in which we feel very comfortable and confident that over the long run we can create far more shareholder value as an independent organization. I'm confident that anybody who has the dreams, aspirations, and money has us on their radar screen, has analyzed our firm from top to bottom, and knows probably as much about us as I do. We would be a fairly indigestible organism unless we wanted to be digestible. The price would be enormous, although there are many who could afford it. But our firm is almost 35 percent employee-owned. The best defense against a takeover is a successful organization with a rising stock price. We've managed to accomplish that, and we are myopically focused on being one of those six-to-10 surviving firms. It's safe to say we'll be an acquirer as opposed to someone who wants to be acquired.

About success in Japan: We launched our first mutual fund in Japan six or seven weeks ago. We raised, in a matter of a week or two - without any distribution - over $750 million for a mutual fund that today is well over $1 billion. We're about to go into the market with another one which, to me, is absolutely indicative of the fact that the Japanese investor is looking for alternatives and for an opportunity to get returns on their investments.
Last November, Lou Gerstner said your entire industry - and not just the discounters - will move to the Internet. Are you worried?
Lou is a good friend of mine. In fact, the day before yesterday we underwrote a $700 million bond issue for him. Strangely enough, I don't know of any of those bonds that were placed over the Internet.
Regarding online business ; The delivery system may change from a 14,000-person delivery system to 14,000 computers overnight. The Internet and technological delivery of the goods and services is clearly in a state of flux, and I'm confident that no one knows the end game today. But we are certainly developing the systems and expertise so that, as things develop, we'll be on the cutting-edge, and if it becomes the more appropriate way to reach the marketplace, we'll be prepared.

But we do not purvey information; we transfer information into wisdom, advice, and guidance. I have yet to see the machine that can transfer wisdom. It is totally appropriate for those who do not need or want advice and guidance to use direct technology access to the marketplace. But it's our belief that once people accumulate assets to a certain level they not only are willing to pay for advice and guidance but they're happy to pay for it.

More mature person as customer:;

That is probably the key strategic question we have in the private client business. Traditionally, our point of view was, where you did business was almost immaterial to us because our bet was that, through our personal delivery system, when you got to the point where you accumulated enough assets that you needed help, we could disintermediate your relationship no matter where it was. And that has worked perfectly; it's been the heartbeat of our strategy these many years. Now, the question is, will we be able to disintermediate my daughter, who is now a freshman in college, in 10 years? I don't know that answer right now. And that's why we are experimenting with artificial intelligence, voice recognition, all these different tools.

I also think people's attitudes toward buying a book from are different from managing their money on a machine. It's a very different equation. But nonetheless, it is a serious issue for us and one that we put a lot of effort into.

Regarding scandal in the industry:
That's something we talk a lot about. I have devoted 30 years of my life to this firm, to helping build its reputation, my own reputation, as have most of my predecessors and most of my colleagues today. We are devoted to the culture and what this firm stands for and do everything we can to protect and enhance that reputation.

Nonetheless, there are always certain things that happen that you can't control, i.e., the Barings situation. If you have a rogue in your organization, he will be a rogue. And the art of management is having both the systems to identify that quickly and the management willing to do something corrective about it immediately.
You also have in this industry huge sums of money involved in these business transactions. People react in different ways to either earning a profit or suffering a loss on investments. So, there are certain things that are endemic to this business that are coupled with an extremely litigious environment to generate some of these situations. But it's no accident we don't employ the star system here. It's not because we don't want to have stars. We do - but we don't let them stray from the reservation.

We have a definitive set of mores and values we expect people to live by. I think if you speak to anyone who's related to this industry, whether it be regulators, our peers, clients, they will say Merrill Lynch is a breed apart as far as our performance, attitude, ethics, and culture. And in spite of that, we do suffer these mishaps from time to time, and we try to deal with them as efficiently and as rapidly as we can.

Meritocracy: I started in Merrill Lynch in 1968. I thought it was a meritocracy then, and I think it is now, and I'm committed to keeping it that way. It's a lot more difficult today from a point of view of the skills you have to master and the breadth of experiences you have to have. It's a lot more difficult to move even from the production side into the management side of the business because people on the production side are extremely comfortable.

On what enabled him to get here?
I often think about that.: Excitement, satisfaction, challenge, risk, reward – all are crafted more carefully to fit my needs and desires in this industry, this job, and this firm. It was as though it was made for me. I tell people, in the 30 years I've been in this business, I have never had a day that I did not look forward to coming . To this day, it happens to be the truth. I'm in my office at 7 a.m., and I'm the most excited guy in the office and the most excited guy at noon, and I'm the most excited guy 10 at night. I just love everything to do with it. It's just terrific.

MARCH 2001

Merrill Lynch's CEO David Komansky

talks about how globalization is giving growth a big boost and how tough the current environment is

Merrill Lynch Chairman and CEO David H. Komansky discussed his strategy for sustaining the company's impressive

If one looks at it in the context of the last five to seven years, the real fuel for much of the growth that Merrill has achieved has been the success in globalizing the firm, and being able to identify in the early 1990s a strategy that dictated that we expand globally to take advantage of many opportunities that exist outside of the U.S.

Then there was the reorganization from top to bottom to execute that strategy. I'm a firm believer that execution differentiates an organization. In our case, our ability to execute a global plan has focused us on becoming a truly global organization and taking advantage of the opportunities that exist in Europe, Asia, and Latin America.

Most segments of the world, while superficially they seem to be in lock step, really are at different stages of development and at different stages of their entrance into the free marketplace. We see, and have enjoyed, opportunities in Europe. Europe is pretty far advanced in its privatization program. We've been very successful to date. We have been very successful building up businesses in Spain, France, the U.K., many places. We see this as the very early days of generating earnings for our firm from Europe. Asia is probably somewhat behind that curve. It's still very early in its privatization programs. We have a very significant operation in Japan and the rest of Asia, mostly in Hong Kong and Singapore. We see great opportunity there.

But at the same time that all of this is going on, the opportunities in the U.S. also continue to grow. Demographics, the creation of wealth, the phenomenon of a growing number of individuals taking more responsibility for managing their own investment assets through IRAs, 401(k)s -- all of these events have helped to create an atmosphere in the U.S. that enabled us to grow very significantly. We've really had a period of great opportunity. And I'd say that over the next five to eight years, the opportunities could well be greater than they have been in the past.

On diversification across business lines - retail, investment-banking, and asset-management franchises.

For many years, the retail, or private-client side, has generated a disproportionate share of revenues and profitability. For the last couple of years, the institutional side has done the same thing. One of the attractive elements of financial institutions like our firm is that we have these various segments. Part of our strategy is to build the capability to offer the best of class on a global basis.

Our growth in the next year or so will be organic in nature.

The greatest challenge in 2001?
Worsening economic climate and the investment climate

Q: In the past, you have stated that you hope to boost your pretax profit margin to 24% by 2003. Are you on track for meeting that goal?
A: It will be difficult to achieve margin improvement. But we remain confident.


To read about the initiatives of immediately preceding CEO, Daniel Tully read

Stan Oneal's Strategy (CEO 2002-2007)

A report on Merrill Lynch performance in 2006 and strategy at the beginning of 2007

Multiple posts of Merrill Lynch Strategies from 1975-2007