Dueling Fools
The Wise Guys
May 5, 1999

The Bull Rebuttal
by Rick Munarriz ([email protected])

Like I figured, Bill laid it on thick in discussing Merrill's initial reluctance to join the online trading fray. Folks said the same thing about Schwab just a couple of years ago. How can the country's largest discount broker not offer Internet trading when all of its peers were? Is www.doomed.com available? History is a soothing teacher. Seemingly overnight, Schwab's market share went from zero to 40% of the online trading niche. Understanding why Schwab became the runaway leader as a latecomer is important in understanding why I feel a slow-footed Merrill will turn out just fine.

Account holders haven't flocked to Chuckie Schwab based on price. It's cruel commission schedule charges many times over what the deep discounters demand. Accountholders haven't flocked to Schwab because it is highly rated either. Every year publications like Kiplinger's, SmartMoney, and even Barron's rate the discounters, and I can't recall ever seeing Schwab come out on top. No, Schwab is the biggest online broker because it was the biggest offline broker. The turtle won the race, fair and square. So, go ahead and mock Merrill's cold feet if you want to -- the once bitten Schwab naysayers would probably advise you against it. Then again, remember that I feel that this is all overblown to begin with. If Merrill were to suddenly acquire 100% of the online trading market, it's top line would only rise by 25%. Insert yawn here.

Bill also seems adamant over the demise of investment banking as we know it. He quotes Michael Lewis extensively. I'm a big fan of Lewis, but let's get one thing out in the open: Lewis had a chance to be one of the earliest investors of TheStreet.com and passed. Why Bill, with supposedly an arsenal at his disposal, devoted so much of his article to quoting the Internet's Pete Best and his vision of the online future is beyond me. Or could it be that Bill believes that Lewis deserves a second chance at online redemption? Like Schwab did. Like Merrill will.

Then Bill turned on the Wit. I'm intrigued like everyone else by the emergence of the Wit Capitals of the world, but I don't see it as threatening. I've seen wineries, breweries, and steakhouses take their small companies public this way. The quality of the offerings speaks volumes since these are obscure upstarts that couldn't draw the interest of the reputable underwriters.

Think about it, when was the last time a supermodel stormed into a cramped unsavory bus terminal only to yell out, "Will somebody PLEASE date me!" These under-the-counter companies taking the direct route to go public are a notch below the ones acquiring a penny stock as a shell company to make their market debut. Saving money? Sure, but it's a harlequin for the unloved. It's like someone justifying taking his mom to the prom as his date because he could save a bundle in gas money.

But the reason why this grass roots movement might be mowed down, beyond the suspect quality of these desperate companies, is that the aftermarket dictates its eventual failure. The novelty of these direct offerings fades as the stocks tank at the open, rather than sustain the asking price if not shoot up higher the way traditional IPO's do. There is no market support from the institutions. There is no legitimate stock research and analyst coverage provided. Even if this were to somehow change, the market mechanics are clear: An IPO accessible to everyone will be bid up by no one.

So let's look ahead. Bill makes the valid point that full-service broker compensation packages and possibly the brokers themselves are on the endangered list. However, can the same be said for the company's $1.5 trillion in client assets, and growing? I don't think so. A leaner Merrill would still be able to sell its wide array of financial products at more attractive price points with the same if not better margins. If anything, it would draw in more new money than ever before.

Merrill isn't as bad as Bill makes it out to be. Seriously. To knock one United Kingdom subsidiary while the firm was named the area's best portfolio trading company in last year's Financial News is senseless. To value Merrill based on "historical" valuation parameters is primitive. There is no brokerage house out there with more than $1.5 trillion in client assets or $10 billion in equity capital. Merrill, by most of Bill's "historical" measures, is one of the cheapest brokerage firms out there today. You don't believe me? Ask Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> who recently made a bid to acquire the company. Or ask Merrill -- dot-com.

Next: The Bear Responds