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So, Selling Assets Isn’t The Same as "Raising Capital"?

Is anyone going to call Merrill Lynch’s (MER) John Thain out on this one?

first we need to go back to April when Merrill CEO Thain first made the statement that Merrill would “not need to raise additional capital”.

Then, in May he inexplicably followed it up again.

Reuters is reporting:
“A blind trust run by New York City Mayor Michael Bloomberg is willing to pay between $4.5 billion and $5 billion to buy Merrill Lynch & Co’s (MER) 20% stake in financial news and data provider Bloomberg LP, the New York Post reported, citing sources.

Discussions are still under way, and a deal could fall apart as Merrill aims to sell its minority stake in the privately held company ahead of its second-quarter earnings call set for July 17, the paper said.

Merrill is also looking to sell part of its 49 percent stake in money manager BlackRock Inc (BLK), which may be sold to multiple parties, the paper said.”

So, this isn’t “capital raising”?

Back in May I wote:
““We deliberately raised more capital than we lost last year … we believe that will allow us to not have to go back to the equity market in the foreseeable future,” Merrill Lynch (MER) CEO John Thain.

What does Thain gain with the proclamation? Nothing. No one believes what comes out of banker’s mouths today anyway, why say it?

It get’s even worse when just hours later he clarified the statement to mean “raise additional cash through equity”. Super, nice job John. Close the door and then go back and open it up a crack.

Now he either will be forced to take a bad deal on a debt offering or asset sale to raise cash if necessary in order to save face. If he does another equity or preferred sale, his reputation at the bank and with shareholders is crushed even before it has a chance to grow. Let’s say he is right? So what? That and $5 will get him a latte’ and Starbucks (SBUX). Had Merrill be forced to tap equity markets again, it would have been bad but now if they do, Thain will most likely be getting his resume updated.

Thain had absolutely nothing to gain by making the proclamation…….nothing. He now has created an atmosphere in which those so inclined (CNBC’s Charlie Gasparino) are going to make sport out predicting when Merrill will need more cash and how they will get it.

I always thought rule #1 was “under promise and over deliver”. Thain ought to see the example set by Berkshire’s (BRK.A) Warren Buffett.”

So, Thain can play semantics here and say he is not raising it through equity. But, isn’t selling very profitable assets hurting the equity? I mean he is taking future earnings from the shareholders through the sale and therefore depressing the future earnings power of the equity holders. Right? One could make the argument that selling assets is a permanent impairment of earnings power while a equity offering isn’t as those shares could be repurchased down the road while the assets continue to become even more profitable than they are now.

It is one thing to shed non-performing assets, this is not what Thain is doing. He is dumping the good stuff.

Once again, shut up and stop making promises you aren’t 1000% sure you can deliver on.

Capital raising is capital raising, I do not care how you do it, equity offering, debt, asset sales, whatever. This is all a bit like saying a high priced escort is not a prostitute because she does not walk the streets, yes she is…

Disclosure (“none” means no position):None

Todd Sullivan's- ValuePlays

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