Tuesday, October 30, 2007

O'Neal Small Cap Co.

Nearly every reporter and blogger in the country is opining about the ouster of Stanley O’Neal from Merrill Lynch. Pumping the Motherhood metaphor for all they are worth, market pundits are speculating on who will succeed the man who had arguably been a successful CEO until the sub-prime loan market took him underwater.

O’Neal’s retirement package is providing new fodder for commentary. O’Neill is reportedly walking out Merrill’s front door with over $160 million in cash and stock awards. Opinion appears to be leaning against such a sizable amount given the magnitude of the $2.2 billion loss reported by Merrill in the September 2007 quarter.

I do not have a problem with Stanley making a bundle. He made many smart moves that made Merrill Lynch employees and shareholders bundles of money too. Why shouldn’t he get a good parting gift?

On the other hand, the size of O’Neill’s retirement benefits and stock awards puts into sharp relief the vast difference between large and small companies. There are thousands of small companies with market capitalizations well below that of the value of just Mr. O’Neal’s retirement package. Few of them are in a position to make the risky choices O’Neal made in taking Merrill into new capital market arenas, in particular collateralized debt obligations (CDOs).

This brings to the fore an important question: if senior executives thought their personal wealth would be at stake along with their company and its shareholders, would they take the same risks? I wonder, if Stanley O’Neal thought any portion of that $160 million might disappear (beyond the value of Merrill Lynch shares), would he have made different choices? Would he have calculated the risk-reward equation in different light? In the least he might have scrutinized more critically the underlying sub-prime mortgages.

If the Merrill Lynch saga teaches us anything about investment decisions, it is that risk is viewed differently when executives are cushioned from the consequences. Yes, O’Neal lost his job and his $40-plus million annual salary. Then again he is walking out Merrill’s door with a nest egg larger than many small cap companies.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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