Merrill Lynch shakeup won't revive moribund shares

NEW YORK (Reuters) - Merrill Lynch MER.N ousted its chief executive, but that won't be enough to revive its battered shares, portfolio managers said.

The successor to Merrill Lynch's Stan O'Neal may well start off by taking big write-downs on any remaining assets whose recorded price on the balance sheet is in any way questionable, portfolio managers said.

"Whoever comes in will want a clean slate," said Ralph Cole, portfolio manager at Ferguson Wellman Capital Management in Portland, Oregon, which owns Merrill Lynch shares.

Merrill Lynch, the largest U.S. brokerage, still has to figure out whether past strategic steps were fundamentally flawed or simply poorly executed, portfolio managers said.

Merrill Lynch sent O'Neal packing after suffering the biggest quarterly loss in its history. It is unclear who will replace him permanently.

Any further writedowns would also mean declines in book value, a measure of the value of a company equal to assets minus liabilities. When book values decline, or are expected to fall, share prices often follow suit.

Merrill shares have fallen about 30 percent this year, compared with a 3.6 percent decline for the Amex Securities Broker Dealer .XBD index.

Merrill Lynch last week said its book value was $39.75 a share, the lowest level since the second quarter of 2006.

Merrill Lynch's shares trade at about 1.6 times their book value, well behind Morgan Stanley's (MS.N) book-to-value ratio of about 2 and Goldman Sachs Group's 2.8, which may reflect, in part, expectations for further write-downs in the fourth quarter, portfolio managers said.

Beyond the write-downs issue, Merrill Lynch has strategic questions to answer, said Adam Compton, co-head of global financial stocks research at RCM Global Investors in San Francisco, which owned Merrill Lynch shares as of its most recent public disclosure.

O'Neal decided that Merrill Lynch should take more risk with the firm's own money. His successor must decide if those losses resulted from a bad strategy, or a good strategy poorly executed, Compton said.

It is unclear whether Merrill Lynch's core business of retail brokerage is compatible with aggressive trading of the firm's own funds, Compton said.

To be sure, bringing in the right leadership would be a positive, said Mike Holland, founder of asset manager Holland & Co. Holland said he would consider buying Merrill Lynch shares if the company hired Laurence Fink, the chief executive officer of BlackRock. (BLK.N) Fink has a reputation for being excellent at risk management.

But even with the right leadership, buying investment bank stocks now is generally difficult, because of questions about their book value, and the lack of businesses that are performing as well as mergers were last year, say Chuck Carnevale, chief investment officer at Great Companies LLC in Tampa, Florida.

"There's too much uncertainty now about how bad the credit crisis will be, and my instincts tell me there more smoke than there is fire, but right now there sure are a lot of people who see blazing infernos," Carnevale said.