Merrill Lynch Chief Stan O'Neal 's credibility has suffered a major blow. It's not just that the Wall Street firm took $8 billion of write-downs in the third quarter for subprime mortgages and collateralized debt obligations, which are backed by pools of assets such as mortgage securities. The amount, more than any of its peers, is bad enough. What's worse is that the hit is a lot larger than the $4.5 billion warning Mr. O'Neal issued just a couple of weeks ago.
How could things change so substantially? After all, the write-downs are tied to a specific point in time -- Sept. 28 -- so market fluctuations since then shouldn't have changed anything. Merrill Lynch says it just decided to use "more conservative assumptions," a shift the company's executives declined to explain further.
That might sound like Mr. O'Neal being cautious. But it actually raises more concerns. For starters, it confirms market worries that investment banks are able to pick and choose how they price their assets -- and that could erode any attempts to rebuild confidence in structured credit after the turmoil of the summer.
More worrying for Merrill, it reeks of dilettantish risk management. There have been more than enough warnings this year that mortgage markets were cratering. And Merrill was arguably in a better position than most of its peers to have its finger on the pulse.
After all, it owns a mortgage lender, First Franklin. Admittedly, the Thundering Herd paid through the nose for it. But the business -- especially its loan-servicing unit -- ought to have provided exactly the kind of information on the subprime market Mr. O'Neal and his team needed to be ahead of the curve.
Merrill also was the top CDO arranger in 2006 and is in second place this year. That ought to have afforded it access to the best data. Beyond that, its prime-brokerage unit was one of the first lenders to seize and sell assets from two Bear Stearns hedge funds in June. Having kicked off the fire sale, Merrill should have been much better prepared for the ensuing rush for the exits.
Instead, it appears it was simply too deep into a market executives were ill-equipped to fully understand. To be charitable, Mr. O'Neal and his team may not be alone in that. But given the size and circumstances of Merrill's losses, their blushes should be the deepest.
Wendel Investissement has scored a nice coup in engineering Europe's first big successful initial public offering since the big summer storm. Bureau Veritas, an industrial-services company owned by the French investment fund, was priced at the top of the range. Wendel, which floated a 33%-odd stake of the company, will bag €1.2 billion ($1.71 billion). But the fund's investors may be uncomfortable with the way the money is spent.
Wendel surprised the investment world by announcing a month ago that it had built up a 6% stake in Saint-Gobain, the French building-materials group. That was hard to square with Wendel's stated strategy of trying to "control" each of its portfolio companies. At €39 billion, Saint-Gobain seemed well beyond the reach of Wendel's €6 billion market value.
Further, it wasn't clear what exactly Wendel could bring to Saint-Gobain, as the company is already well into a restructuring plan -- which Wendel CEO Jean-Bernard Lafonta said he supported. Saint-Gobain shares are still up 25% over the last year, even though they're down 14% from their July high.
Now it looks like Wendel will use part, or even all, of the Veritas proceeds to increase its stake to at least 10%, maybe more. It could probably afford to go as high as 15%. At that level, about half of Wendel's portfolio could be tied up in Saint-Gobain. The investment fund's strategy not too long ago was to focus on nonlisted assets bought through private-equity-type deals. Now it seems to seek refuge in conservative, blue-chip investments.
Such a big commitment could make sense if Wendel had a plan for Saint-Gobain. The fund reportedly would like Pierre-Andre de Chalendar , Saint-Gobain's boss, to "accelerate" his strategy. Easier said than done. The next big item on the restructuring agenda is the sale of Saint-Gobain's packaging division, roughly expected to fetch around €4 billion. But private-equity buyers who were keen in the spring have vanished over the summer.
That's not too bad for Saint-Gobain, since it is turning around the division and isn't in a rush to sell. But it does leave open the question of what the big new shareholder really has in mind. If Wendel has some bright and better ideas about "accelerating," maybe now would be the time to disclose them.
In case Carlsberg was under any illusions, Scottish & Newcastle has signaled it isn't prepared to go quietly into the night. The Danish brewer's proposed bid for its U.K. rival is undoubtedly a breach of faith, since it is an attempt to gain full control of Baltic Beverages Holding, their Russian joint venture, on the cheap.
Now S&N claims it is also a breach of the legal terms of the BBH shareholder agreement, which set out a clear "shotgun" mechanism for either side to dissolve the relationship. S&N argues that Carlsberg is now obliged to offer it its stake at the market price.
The validity of S&N's claims is hard to judge since the terms of the agreement are confidential. But Carlsberg has dismissed the claim as "without merit." Presumably Carlsberg's lawyers pored over the details before talking to its consortium partner, Heineken. Still, even if it is a legal long shot, S&N is right to explore any avenue that might give it 100% control over BBH, since that would increase its options, whether as a standalone company or as a future bid target.
Even if the legal bid fails, S&N's move helps focus the debate on the value of BBH, the central issue in any bid for the group. As the No. 1 brewer by market share in one of the world's fastest-growing beer markets, BBH ought to command a premium to recent emerging-market brewing deals.
Even a bid for S&N at 790 pence ($16.20) -- above the current share price -- would implicitly value BBH at only 16 times expected 2007 earnings before interest, taxes, depreciation and amortization, according to Collins Stewart research. That values BBH in line with smaller, lower-margin brewers.
The danger for S&N shareholders, many of whom invested knowing the brewer was a likely takeover target, is that this process now drags on as the lawyers get to work. But they will draw comfort from the thought the status quo is no longer an option: The breach of trust between the two brewers is too great.
Either way, shareholders seem likely to receive the full value of their BBH stake, whether reflected in a bid by Carlsberg or the chance for S&N to buy BBH itself.
Antony Currie, Richard Beales, Pierre Briançon and Simon Nixon
This column is written by breakingviews.com , an online financial commentary site.