Reuters reports that Merrill Lynch & Co., Inc.'s (NYSE: MER) is the next bull for shorts to gore. And with Merrill trading 77% below its year ago level at a 12 year low, it looks like those shorts are winning. But analysts think that the value of some of its remaining assets are worth more than twice its current share price. The question that keeps shorts in clover is that nobody knows how much Merrill's liabilities subtract from that amount.
In theory, a company's worth should equal the value of its assets less that of its liabilities. And according to Reuters, Merrill's assets include salable businesses worth $40 a share. These include "Merrill's stake in investment manager BlackRock [which] is worth about $9 a share and its wealth management franchise -- the largest by number of brokers and by assets -- is worth $16 per share. Analysts attributed an additional $15 per share to the bank's institutional business," according to Reuters.
On the liability side of the ledger are commercial mortgages and other mortgage-backed securities (MBS) which are counted as assets but as a practical matter represent liabilities because Merrill must adjust them on their books to reflect their far lower market value. Reuters writes that, "looming large among investors' worries about Merrill are mortgage-backed securities and other structured debt held at two of its banking subsidiaries -- Merrill Lynch Bank USA and Merrill Lynch Bank & Trust Co."
These banks may need more capital -- representing an uncounted liability that could create future challenges for Merrill. "One hedge fund manager who is short Merrill said he sees these banks, which hold loans and deposits made through Merrill's network of financial brokers, needing more capital, which will have to be provided by the parent," wrote Reuters.
With Merrill's stock at $17, the shorts are assigning a value of at least $23 a share to these and other liabilities. While I'm afraid it's too late for value investors to save Merrill's stock, the question for investors is whether the market's estimate of those liabilities is accurate. We'll know more in the next week.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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