Many investors agree that New York City-based company Merrill Lynch, is a force to be reckoned with in investment circles. Nevertheless, having lost more than $40 billion on its mortgage investments since the beginning of the credit crisis, it is clear that Merrill Lynch has not been impervious to the negative effects of the volatility of the current market. However, it still came as a shock to many when the company yesterday revealed its plan to raise $8.5 billion through the sale of new shares on the New York Stock Exchange.
This move is bad news for existing shareholders, as the $8.5 billion equates to over a quarter of the company’s current market capitalization, meaning that shareholder’s individual stakes in the company will be drastically diluted. Some investors are of the opinion that it brings the company, and particularly CEO John Thain’s, credibility into question. Thain has been CEO of Merrill Lynch since November 2007, and he has repeatedly gone on record in recent months as saying that the company had no need to raise new equity capital. Shareholders were reassured by Thain that if the need for additional money arose, he would raise that money by selling assets. To this end, the sale of Merrill Lynch’s twenty percent stake in Bloomberg went through earlier this month for $4.4 billion.
On the other hand, the move of ridding the company of its portfolio of collateralized debt obligations (CDOs), which were valued at $11.1 billion and sold last night for $6.7 billion, may be seen as a clean-up of Merrill’s operations in order to move ahead unhindered. The value of mortgage derivatives is measured by the value of the underlying collateral of US house prices. With the current free-fall situation in the US housing market, these mortgage derivatives have become virtually impossible to value. Therefore, Thain is of the opinion that the CDO sale is a milestone in the company’s risk reduction efforts, while the issuing of common stock is a means to further enhance Merrill’s capital position.
Already Merrill Lynch’s biggest investor after their investment of $4.4 billion in December 2007, the Singapore-owned fund, Temasek Holdings, plans to buy $3.4 billion of the new stock. This is seen as further evidence of emerging market countries wielding increasing global financial power.
