Merrill Lynch may face US$2.1 billion restructuring charge

Every analyst who covers Merrill Lynch & Co says the biggest securities firm will take a restructuring charge in the fourth quarter. Bear Stearns Cos' Amy Butte was the first to predict its size: US$2.1 billion.

This isn't the first time Butte has gone out on a limb to try to differentiate herself from her competitors and build a name for herself. Two years ago, while most other analysts were telling investors to buy shares of Knight Trading Group Inc, Butte rated it "unattractive," drawing ire from hundreds of individual investors.

"Amy's doing what she's supposed to be doing and getting in front of what that number is," said Dan Goldfarb, a money manager at David L. Babson & Co in Cambridge, Massachusetts, which owns about 1.5 million Merrill shares and has about US$10 billion in equities. "We know Merrill has to take a charge for the restructuring; we know it's going to be big."

Some investors say Butte staked her reputation when she took a contrary view on Knight. The shares have fallen 56 percent since her rating. In today's call, she takes a similar risk, because her direct assertion can be proven wrong when Merrill announces its fourth-quarter results later this month.

Money managers surveyed by Institutional Investor magazine this year voted her the third-best brokerage analyst on Wall Street, up one spot from her ranking the previous year.

In a note to clients on Friday, Butte estimated Merrill has eliminated at least 5,600 jobs in the fourth quarter and will take spend US$2.1 billion on severance costs. Butte, who rates Merrill ``neutral,'' also covers 14 other brokerage and asset management companies, To calculate the size of the charge, Butte said she estimated that Merrill eliminated 1,400 associate-level employees, 1,400 vice presidents and 2,800 managing directors. She talked to several "industry sources" to come up with her estimates.

In October, when Merrill offered buyouts to most of its employees, the firm said those who left voluntarily or were fired would receive up to 54 weeks' pay, depending on length of service, in addition to 40 percent of their year 2000 bonuses. Butte estimated the average associate would receive US$80,000 in severance, US$200,000 for vice presidents and US$600,000 for managing directors.

"We do not think the Street is anticipating such a large write-off," Butte said. The size of the charge is a result of the large number of senior, high-paid employees who received severance packages during the quarter.

Among the most senior executives who left the firm and probably collected multi-million dollar severances were Jeffrey Peek, who headed asset management, and Winthrop Smith, head of the firm's international brokerage division. Both competed with Merrill's President Stanley O'Neal to win the firm's No. 2 spot.

"We sense that this round of reductions was weighted towards senior-level employees and was relatively generous," Butte said.

If Butte is right, the charge will amount to about 10 percent of the firm's US$20.7 billion book value, she said. The resulting reduction in book value, or corporate net worth, will make Merrill among the most expensive brokerage stocks as measured by share price relative to book value, she said.

"They'll be taking a charge against their equity," Butte said. Merrill officials "couldn't really make any comments to me about the report," Butte said. "They've been using `body language' that they agree that more senior people are involved."

Analysts Joan Solotar of Credit Suisse First Boston and Henry McVey of Morgan Stanley Dean Witter & Co yesterday cut their earnings estimates for Merrill because of severance charges from job cuts.

Butte is in the minority in recommending that investors avoid Merrill shares. McVey, the top-ranked analyst in Institutional Investor's survey, and Guy Moszkowski of Salomon Smith Barney Inc, who ranks second, are among 14 analysts who recommend Merrill shares.