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Replacing O'Neal: Who Waits in The Wings?

If Merrill Lynch Chief Executive Stan O'Neal is forced out, there's little doubt who the firm's army of more than 16,000 brokers would like to see replace him: their own boss.

Robert McCann, president of Merrill Lynch's global private client business, has emerged as a potential candidate to replace the embattled O'Neal. Other candidates include BlackRock Chief Executive Larry Fink and NYSE Euronext CEO John Thain as possible replacements.

O'Neal's grip on Merrill has weakened after the company posted its biggest quarterly loss in its history. O'Neal admitted this week he and his team misjudged the company's exposure to subprime mortgages, triggering an $8.4 billion write-down in the third quarter.

McCann looked to have been sidelined just a few months ago after his direct reporting line to O'Neal was severed. But now he's making a comeback.

"If naming your CEO was a popularity contest, Stan would be out and McCann would be in. But we know it doesn't work that way," said a Merrill Lynch executive, who declined to be named.

It's unclear if McCann has enough recognition among Merrill Board members, a group put together during O'Neal's tenure.

But Tom Sowanick, chief investment officer of Clearbrook Financial in Princeton, N.J., said McCann has the experience and leadership skills to run Merrill. Sowanick, a former Merrill Lynch wealth management strategist, worked for McCann before leaving the company.

"Bob is a very demanding yet capable leader. He will be able to shepherd Merrill Lynch out of this storm," Sowanick said.

Fink's candidacy has gathered steam because he is considered one of the top U.S. bond managers. He also is seen as someone who can remedy Merrill Lynch's fixed-income problems.

Thain has a blue-chip Wall Street resume, with credentials sharpened by running NYSE and his time as a former co-president at Goldman Sachs.

A spokeswoman for BlackRock, an asset manager in which Merrill holds a large stake, declined to comment, saying the company does not comment on market speculation and rumors. NYSE spokesmen were not immediately available to comment.

Merrill's retail brokers have already lost confidence in O'Neal, thanks to the massive writedowns that happened on his watch. And some brokers are nervous that Merrill could be an attractive takeover target for a foreign bank. The company's depressed stock price and nearly $2 trillion in client assets might spur action from bidders.

Deutsche Bank analyst Mike Mayo said Merrill could fetch $100 to $120 a share in a takeover. That's a 90 percent premium over the company's current trading price.

A report in the New York Times Friday said O'Neal directed investment bank head Greg Fleming to approach Wachovia about a merger. Dick Bove, an analyst at Punk Ziegel & Co., said the overture "may indicate some panic on Mr. O'Neal's part."

Many investors share the brokers' feelings about O'Neal, who the Times said has also angered the board by authorizing the Wachovia talks without consulting with it.

Merrill Lynch declined comment for this story.

"We're clearly disappointed in Stan O'Neal..." one of Merrill's largest investors said on condition of anonymity.

CNBC learned on Friday that O'Neal had conceded to friends he could be out of a job by the end of the weekend.

Brokerage: Where Merrill's Strength Lies

Whatever happens, McCann looks to be making an unlikely recovery within Merrill's power structure after appearing to be the odd man out among senior executives at Merrill Lynch just a few months ago.

A reorganization announced in May cut the direct reporting line between McCann and O'Neal. Ahmass Fakahany and Fleming became co-presidents and seemingly gained power. Fakahany is one of O'Neal's closest confidantes and Fleming is seen as the company's star investment banker.

At the time, Merrill downplayed the move, saying McCann was still a candidate, along with several other executives, to succeed O'Neal.

Merrill shares, down 32 percent this year, rose more than 7 percent Friday on speculation O'Neal would be replaced.

McCann, in charge of Merrill's 16,610 brokers, is insulated from the turmoil dogging O'Neal. Revenue at his division, Merrill Global Private Client, surged 23 percent to $3.3 billion in the third quarter. And a flood of $26 billion in net new client assets was the strongest quarter in more than six years.

During a tense conference call with analysts and investors Wednesday, O'Neal got a rare chance to be upbeat when he discussed Merrill's global wealth management business, which mostly consists of McCann's operations.

"Our global wealth management (revenue) was up 30 percent, and from my own point of view, this is the best business of its kind in the world and continuing to get stronger," O'Neal said.

Bernstein Research analyst Brad Hintz said Merrill's retail brokerage produced a 28.7 percent pre-tax margin during the first half of this year. That's better than the 23.8 percent at Citigroup's Smith Barney and Morgan Stanley's 15.8 percent.

But if Merrill takes a further $4.5 billion write-down on subprime-related assets in the current quarter, as some analysts suggest, the book value of the overall company would decline an additional 10 percent, Hintz said.

O'Neal's town hall meeting Wednesday drew several hundred employees, with some worried about their jobs and their pay. Many questions came from Merrill brokers.

McCann Bio:

Robert J. McCann, 48, has been executive vice president at Merrill since August 2003 and has headed the firm's Global Private Client unit since June 2005. Before that, he was vice chairman of Merrill's Wealth Management Group from August 2003. He worked as vice chairman and director of Distribution and Marketing for AXA Financial from March 2003 to August 2003.

Fink Bio:

Laurence D. Fink, 54, has been chairman and chief executive officer of BlackRock since its formation in 1998 and of BlackRock's predecessor entities since 1988. He's also the chairman of BlackRock's executive committee and management committee.

Thain Bio:

John A. Thain, 51, is chief executive officer and a director of NYSE Euronext. He was chief executive officer and director of NYSE Group from the time of the company's formation in March 2006. Thain joined the NYSE on January 15, 2004, serving as CEO and director. Before that, Thain worked as president and operations chief of Goldman Sachs.