Merrill’s Pinch: Hemorrhaging Their Star Bankers, They’re Lagging in Tech

When Joseph M. Schell, then co-head of investment banking at NationsBanc Montgomery Securities, announced his resignation from the firm in

When Joseph M. Schell, then co-head of investment banking at

NationsBanc Montgomery Securities, announced his resignation from the firm in

January 1999, the news rated the barest of mentions in a world punch-drunk with

Nasdaq highs and tech-I.P.O. mania.

Mr. Schell, then 53, had had a nice, if not especially

inspiring, 15-year run at Montgomery Securities, presiding over the rapid

growth of the firm’s tech-focused investment-banking business. He and his

longtime colleague at Montgomery, Thomas Weisel, had become very wealthy after

Montgomery was bought out  by

NationsBanc in 1997. A year later, when Bank of America merged with

NationsBanc, Mr. Weisel bolted with more than 60 key Montgomery bankers to

start up his own firm, while Mr. Schell stayed behind. But Mr. Schell was soon

gone, too; the new Banc of America regime had its own ideas and plans for

Montgomery, and Mr. Schell was not part of them. Mr. Schell resigned.

And why shouldn’t he have?

Fifteen years of work in Silicon Valley and the payoff from the Montgomery sale

made for a nice retirement nest egg. It was time to relax and enjoy the good

life in the San Francisco Bay area. At his going-away party, Mr. Schell told

colleagues that he intended to do some teaching in the area and play a little

golf. He also had plans to join a number of local civic and corporate boards-not

to mention spend more time in Hawaii.

So when Merrill Lynch put out a press release on Feb. 3,

2000, announcing the hiring of Mr. Schell as its new head of global technology

investment banking, eyebrows in the Valley as well as on Wall Street arched.

That Merrill was badly trailing the likes of Morgan Stanley,

Goldman Sachs and Credit Suisse First Boston in the Gold Rush–like banking

battle for Internet and tech I.P.O.’s was well known. According to Thomson

Financial Services, Merrill Lynch ranked fifth in U.S. technology mergers and

acquisitions in the year 2000, a relatively low ranking for a bulge-bracket

firm of Merrill’s heft and size. (A Merrill Lynch spokeswoman said that the

firm’s market share for tech M.&A. had increased markedly that year.)

At the time, raising

money for Internet companies and advising them on mergers and acquisitions had

become one of the hottest money-making rackets to hit the Street since the

leveraged-buyout craze of the mid-1980’s, and Merrill Lynch, quite simply, was

getting beaten by its peers. Even with tech stocks plunging, it’s still

considered the business to be in. It was more than a question of dollars and

cents; it was a matter of prestige.

Rival bankers knew that at some point, Merrill would have to

act. But was this to be its big move-hiring the retired Mr. Schell to undertake

the onerous task of igniting Merrill’s tech business?

“We were all surprised [by the hire],” said a Banc of

America Securities banker with direct knowledge of the matter. “Joe was

squeezed out of his job here. And he was also one of only two people on the

Montgomery executive committee that Tom Weisel did not take with him. Draw your

own conclusions.”

That’s exactly what Merrill’s own frustrated top bankers

did-and have continued to do ever since. In fact, a half-dozen former senior

Merrill Lynch bankers interviewed said that the hiring of Mr. Schell set off a

pinball-like reaction, triggering a succession of key resignations, mini-palace

revolts and general unrest within Merrill’s overall investment-banking

division. The ball is still in play more than a year later.

What’s more, it may remain in play. Merrill observers have

speculated that the investment-banking turmoil could affect chief executive and

chairman David Komansky’s impending decision to name a successor.

All in all, the Schell appointment and its aftermath raises

anew questions about whether Merrill Lynch is capable of adapting to a climate

that favors quick-thinking and aggressive bankers. Or whether it will stick to

its cautious ways and essentially sit out the hottest game on the Street. Who

will win: the bankers or the bureaucrats?


Losing Derek Jeter

The first repercussions took place within days of the

official announcement of Mr. Schell’s hiring. Mark Shafir, then head of

Merrill’s technology banking, immediately resigned, taking with him a small

clutch of senior bankers.

The big news, however, came a month later, when Jack Levy,

the rain-making head of Merrill’s well-regarded mergers and acquisitions

business, announced his abrupt departure for key rival Goldman Sachs. To lose

Mr. Shafir was one thing, but Jack Levy-well, he had built up Merrill’s

M.&A. business from scratch during his 10-year reign.

“People were shocked when Jack left,” said a former Merrill

banker. “How could they have let him walk? It’s like the Yankees letting Derek

Jeter go-it just doesn’t happen.”

One year later, senior Merrill Lynch executives seem to have

come to a similar conclusion. On Feb. 9, the company announced that Daniel

Bayly, who had hired Mr. Schell and presided over Merrill’s investment-banking

unit since 1995, would be bumped up to a fairly ceremonial position, chairman

of the business. He would be replaced by two young up-and-comers, Sam Chapin

and Kevan Watts, who were named co-heads.

Two other veteran Merrill bankers-Justin Dowley and Huston

McCullough in London-announced that they would be retiring, together with Dan

Dickinson, one of the successors to Mr. Levy as M.&A. head.

Merrill officials insist that the latest changes are part of

an orderly transition, and that may indeed be so. But there is no getting

around the fact that Merrill’s long and miserable performance in technology

investment banking seems finally to be coming home to roost.

While Mr. Bayly can look forward to a more pacific time of

leisurely lunches with clients, still on the hot seat is Thomas W. Davis, the

head of Merrill’s CICG (Corporate and Institutional Client Group) division,

which oversees all the firm’s institutional capital-markets business. A

long-standing favorite of Mr. Komansky, Mr. Davis has been mentioned

prominently for three years as a potential candidate for the president’s slot,

the No. 2 position at Merrill that has remained empty since July 1999, when

Herb Allison was told by Mr. Komansky that he would not succeed him.

Mr. Komansky, 61, a genial bear of a man who rose through

the firm’s retail-brokerage side, has said that he will retire in 2004. He has

also said that he will recommend a successor to the Merrill Lynch board by the

beginning of next year.

Now, though, Merrill Kremlinologists say that Mr. Davis may

no longer be the favored son-and they look instead to E. Stanley O’Neal, head

of the private-client group, the unit that comprises Merrill’s 19,500 retail

brokers and the $1.7 trillion in customer assets they oversee, and to Jeffrey

Peek, who runs the asset-management business, as the leading contenders for the


Like all good Merrill

managers, Mr. Davis’ job has been to keep the revenues flowing, as well as to

keep his sometimes obstreperous bankers in line. On the surface, he seems to

have done a fine enough job-indeed, his $21 million salary (including restricted

stock and options) for last year was a 28 percent raise from the year before.

And Merrill reported record pretax earnings of $3.9 billion in its CICG unit

for the year 2000.

But the tech rankings were something of an embarrassment,

and the drum beat of retirements and departmental reorganizations suggests some

organizational shakiness within the great Merrill edifice. With its 72,000

employees, its many little fiefdoms and its exalted sense of place and history,

Merrill Lynch is the nearest approximation on Wall Street to the federal

bureaucracy. Hierarchy and seniority matter. So when bankers become stars, they

inevitably clash with their managers. It has happened before: A star banker,

raking in the fees, will aspire to a broader organizational remit. Risk-averse

department heads will blanch at the prospect of a hotshot deal maker and his

band of followers making big, ballsy bets. Egos clash; bankers move on. But for

how much longer can they continue to do so at Merrill before Mr. Davis starts

to feel some of the pain?

Says one former Merrill banker: “Tom is a nice guy, but at

some point he will have to bear responsibility for sticking with Dan Bayly as

long as he did.”


Bayly’s Move

By most accounts, Mr. Bayly, then head of investment

banking, was feeling stiff pressure to do something about the firm’s flagging

tech banking business entering 2000. Mr. Bayly was a career relationship

banker, described by former colleagues as the friendliest of men, a soft

compromiser and a manager comfortable in a bureaucratic setting. Trim and a bit

gray, he is the classic Merrill man. He had been plucked in 1995 by

then–institutional chief Herb Allison from the relative obscurity of the

Chicago banking office to co-head investment banking with Mr. Davis.

“There was something

Columbo-ish about Dan,” said one former banker who worked closely with him at

Merrill. “He was good enough to keep the trains running, but loyal enough so

that Allison did not have to worry about investment banking being difficult.”

Mr. Davis, then a rising star, was rapidly promoted,

replaced by Mr. Peek, who also was on the fast track and soon moved on to run

asset management. At the start of 1998, the show was finally Mr. Bayly’s very

own. For a while, things were fine. The M.&A. business boomed under the

charismatic leadership of Mr. Levy. But tech continued to lag, and that is

where the  money was.

Throughout much of 1999,

Mr. Bayly had a two-man team running tech: Scott Ryles and Mark Shafir, both

based in Silicon Valley. Mr. Ryles, a corporate finance banker, had been sent

out to the coast by Mr. Allison, and Mr. Shafir was an M.&A. banker who

reported to Mr. Levy. Both were well-regarded bankers with very strong

personalities, and for much of that year they butted heads as they tried to put

a charge into Merrill’s sagging tech business. Results were slow in coming,

though, and Mr. Bayly began to feel the pressure to make a change.

In November 1999, Mr. Ryles left for a tech banking

start-up, Epoch Partners, and Mr. Shafir was left alone to run the business.

Unbeknownst to him, however, Mr. Bayly had decided to go outside the firm to

replace him.

Enter Mr. Schell.

Sources familiar with the matter say that Mr. Schell came to the attention of

Mr. Bayly through Chuck Lewis-a senior Merrill banker who knew Mr. Bayly from

their time working together in Chicago, and who was a college roommate of Mr.

Schell’s at Amherst. Following Mr. Schell’s retirement, these same sources say,

Mr. Lewis contacted him and asked him about the Merrill position. Mr. Schell

was interested, Mr. Bayly was all for it, and by early February it was a done

deal. (A Merrill Lynch spokesperson says that Mr. Schell’s hiring went through

all the appropriate channels.)

Shocked and outraged, Mr. Shafir-who had been kept out of

the loop-resigned that day (he now works at Thomas Weisel Partners). Just as

outraged was Mr. Levy, who also was not consulted on the matter.

For Mr. Levy, it was the straw that broke the camel’s back.

A Merrill veteran of 22 years, Mr. Levy, 47, had run M.&A. since the early

1990’s. Over that period, Merrill’s merger business had shot to the top of the

league tables in 1997 and 1998. Mr. Levy, with his sturdy frame and ready

smile, was something of an anomaly within Merrill: a media-friendly,

larger-than-life banker who stood strikingly apart from his gray, dull-suited

peers. Fortune and Business Week ran flattering profiles,

leading with Mr. Levy’s famous Tom Cruise turn-a video skit for Merrill bankers

where he pulled off a fine “Show me the money” cover. A tenacious banker with

just a touch of flash, he would fight tooth and nail to get his deals done, as

well as to get his people paid. Mr. Levy declined to comment on his time at

Merrill Lynch. 

Even before the Schell hire, Mr. Levy had been getting a bit

antsy, some of his former colleagues suggest. In fact, they say, he’d had a

number of conversations with Mr. Davis throughout 1999 and 2000 in which he

made clear his concerns about the firm’s laggardly performance in tech as well

as in Europe, and also its slack investment-banking leadership. Mr. Levy,

sources say, was also contemplating asking for broader organizational

responsibility within the firm-possibly as head of investment banking, possibly

as a member of the firm’s management committee, possibly even as a roving chair

or co-chair in the vein of Barry Friedberg (with whom he’d always been close),

the chairman of CICG.

But, sources say, Mr. Levy made it very clear to Mr. Davis

that before taking on such a role, investment banking needed to be fixed. Mr.

Davis, however, wavered; never known as a risk taker, he was not ready to let

Mr. Bayly go. He remained noncommittal. 

When Mr. Schell reported to work, then, the sparks

immediately began to fly-especially when Mr. Levy was told by Mr. Bayly that

Mr. Schell would have responsibility for tech M.&A. Additionally, sources

say, Mr. Schell was bringing with him two managing directors from Montgomery

with little tech banking experience, who were now to be in Mr. Levy’s group.

Mr. Levy, by all accounts, was irate.

“These guys were covering restaurants. And what’s more, they

were getting ridiculous salaries, at $3 million a year. Joe was in over his

head,” said one former Merrill banker.

Mr. Levy immediately made his views very clear to Mr. Bayly

and Mr. Davis. But the new structure would stand. So Mr. Levy decided to make

his move, and on March 14 he announced his resignation from Merrill and his

move to Goldman Sachs. (He remains there now, as co-chairman of global


At which point, Mr. Bayly hit the panic button. On March 16,

he quickly appointed Dan Dickinson and Steven Baranoff as M.&A. co-heads

and, afraid that Mr. Levy’s acolytes would follow him to Goldman, he got Mr.

Davis and the management committee to okay many millions of dollars in financial

guarantees to as many as 20 key M.&A. executives, former Merrill bankers

said. And these weren’t minor adjustments, either. One M.&A. banker saw his

salary jump from $2 million to $6 million-which, with added stock and benefits,

made for a $20 million package.

When word got out, all hell broke loose. Merrill bankers on

the corporate-finance side insisted on their fair share. “They had a huge

problem, because the numbers were so off the mark,” said another banker. “You

don’t have to triple someone’s salary to keep him. It created a tremendous rift

between the M.&A. and the relationship guys.”

Just a few months later, the Nasdaq crashed, putting the

squeeze on investment-banking revenues. All of a sudden, Mr. Bayly was

confronted with a much higher fixed-cost base in a weakening market and a

disconsolate band of bankers. Mr. Bayly, according to one former Merrill

executive, even contemplated rescinding some of the guarantees, which only

heightened the uproar. Bankers were infuriated: Mr. Schell comes in, Mr. Levy

leaves, then they promise to pay up, now they want to take it back. Is Dan

Bayly really up to running this shop? many began to ask.

Indeed, it is the very question that Mr. Levy is said to

have put to Mr. Davis just before he departed in March 2000. When was Mr. Davis

going to make a leadership change? According to one Merrill banker with

secondhand knowledge of the conversation, and who left the firm before Mr. Levy

did, Mr. Davis’ response was blunt and to the point: “You don’t take a man out

in a shit fight.” Translation: Remember, Jack, this is Merrill Lynch. Good

company men aren’t fired-especially when they are under the gun.

The message seemed clear: At Merrill Lynch, it’s the bankers

that walk and the managers that stay on. Mr. Davis declined to comment on the


This February, however, Mr. Davis finally acted. Mr. Bayly

is now in his ceremonial chairman’s role, with Sam Chapin and Kevan Watts

sharing his former job. Mr. Schell continues on as head of tech investment


On the subject of Mr. Bayly, a Merrill Lynch spokesperson

said: “Under Dan Bayly’s leadership, investment-banking revenues reached record

levels five years in a row. Dan is one of the most highly respected bankers in

the industry.”

But the question still endures: Why can’t Merrill Lynch keep

its investment bankers happy?


Risk Aversion

It has happened before. Edson Mitchell, the legendary bond

trader who built up Merrill’s bond business in the early-1990’s, was forced out

in 1995 by Herb Allison, who, by most accounts, felt threatened by his

extraordinarily loyal following. Mr. Mitchell went on to build a formidable

investment-banking business at Deutsche Bank with a slew of Merrill bankers,

before dying in a plane crash last December. And now, Mr. Levy-off to arch

competitor Goldman Sachs, no less.

“Merrill managers are like Soviet apparatchiks,” says one

recently departed senior banker. “It’s a consensus-oriented,

don’t-fuck-up-don’t-rock-the-boat management style. They believe in the end

that the brand will prevail, as long as

nothing really bad happens.”

But this risk-averse

style also has its drawbacks. It may be fine for managing the bread-and-butter

broker business, but when it comes to investment-banking decisions, where the

emphasis is high-risk and high-return, such a style can be a disadvantage,

bankers say.

Many Merrill bankers interviewed for this story attribute

the firm’s technology problems to the deeply conservative, no-risk tendencies

of former president Herb Allison, who headed the institutional division in the

early 1990’s.

“Herb had different priorities when he was running banking,”

says another ex-Merrill banker. “Building up a tech banking business was just

too risky for him. He wasn’t comfortable with the cycles, the up-front costs.

That was not the kind of decision that he made well.”

Which brings us back to Mr. Komansky’s decision. What the

Schell-Levy affair shows is that the manager-banker divide remains as wide as

ever at Merrill. Indeed, Mr. Komansky himself must understand that his

successor as C.E.O. will come from the banking ranks: Mr. Davis, Mr. Peek and

Mr. O’Neal have all progressed to their current positions via banking-related

units, not the private-client system. And investment-banking revenues are

nearly double what the brokerage network pulls in.

Still, bankers feel like

second-class citizens.

“Bankers don’t run Merrill Lynch,” says one senior banker

who left years ago. “And until they do, this banker-bureaucrat schizophrenia

will continue.” Merrill’s Pinch: Hemorrhaging Their Star Bankers, They’re Lagging in Tech