Real Value Creation

“As the Big Board's chief for nearly four years, John Thain engineered two big deals that helped significantly increase the value of New York Stock Exchange members' stakes.

“Mr. Thain, Merrill Lynch & Co.'s new chief executive… may need to resort to those deal-making skills -- and make some tough decisions.

“Such moves, Wall Street executives say, could include separating the firm's pieces…

“The reason for some deal making is that Wall Street is valuing Merrill at $49 billion. That is less than what some analysts and investors believe Merrill's pieces are worth. One analyst estimates the value of Merrill's brokerage business, with its 16,000 brokers, at $36 billion…

“BlackRock Inc., the asset-management firm in which Merrill has a nearly 50% stake, has a stock-market value of nearly $23 billion, making Merrill's stake in that alone valued at $11.5 billion. Analysts say Merrill's stake in Bloomberg LP, which isn't publicly traded, is valued at an additional $4 billion.

“That adds up to nearly $52 billion. And that doesn't include the institutional-securities business, which generated the mortgage losses but which has in the past few years reported higher profit than the brokerage arm and will likely make good returns in the future.”

(“At Merrill, Thain Faces Tough Calls.” Randall Smith and Aaron Lucchetti. Wall Street Journal: November 16, 2007. pg. C.1)

SYNERGIES come in two types: the most exciting are seeming revenue synergies -- where grand schemes project novel combinations yet untried. The more mundane are cost synergies -- where routine operations are melded into economies of scale. The former destroy value; the latter may create value. Focus! and the deconstruction likely will be greater than the sum of the parts.