Note 2. Other Significant Events
New Accounting Pronouncements
In fiscal 2001, Merrill Lynch adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.133 requires Merrill Lynch to recognize all derivatives as either assets or liabilities in the Consolidated Balance Sheets and measure those instruments at fair value. If the derivative qualifies for hedge accounting, depending on the nature of the hedge accounting relationship, changes in the fair value of the derivative will either be offset by the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recorded in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the derivative hedging instrument will be immediately recognized in earnings. Derivatives that do not qualify for hedge accounting must be recorded at fair value, with changes in value reported in earnings.Prior to the adoption of SFAS No. 133, the majority of Merrill Lynch's derivatives were recognized at fair value in trading assets and liabilities, as they are entered into in a dealing capacity. However, Merrill Lynch also enters into derivatives to hedge its exposures relating to non-trading assets and liabilities, some of which, depending on the nature of the derivative and the related hedged item, were not carried at fair value. The new standard primarily impacts the accounting for derivatives used to hedge borrowings.
On adoption of SFAS No. 133, all existing hedge relationships were designated anew. The impact of adoption was not material.
Mergers, Acquisitions, and Divestitures
In July 2000, Merrill Lynch acquired Herzog, a leading Nasdaq market-maker, through an exchange offer followed by a merger of a wholly-owned subsidiary of Merrill Lynch & Co., Inc., with and into Herzog. Pursuant to the offer and the merger, each Herzog shareholder, after giving effect to the two-for-one common stock split, was entitled to receive 283.75502 shares of ML & Co. common stock for each share held. A total of 17,100,602 shares of ML & Co. common stock were issued in connection with this transaction. In addition, as specified in the merger agreement, Herzog treasury shares (2,449,090 shares of ML & Co. common stock) were cancelled and retired upon consummation of the merger.The merger has been accounted for as a pooling-of-interests, and accordingly, prior period financial statements and footnotes have been restated to reflect the results of operations, financial position, and cash flows as if Merrill Lynch and Herzog had always been combined. The effect of combining Herzog into the results of operations, financial positions, and cash flows of Merrill Lynch was not material.
In August 1998, Merrill Lynch acquired the outstanding shares of Midland Walwyn Inc. ("Midland"), a Canadian broker-dealer, in a share exchange. Each Midland shareholder received either 0.48 shares of ML & Co. common stock or 0.48 exchangeable shares of Merrill Lynch & Co., Canada Ltd. for every Midland share held (see Note 8). The merger was accounted for as a pooling-of-interests.
During 1998, Merrill Lynch acquired Howard Johnson & Co., a U.S. employee benefits consulting firm and a majority interest in a non-U.S. investment bank in transactions accounted for as purchases. Aggregate consideration of $92 million was paid, and goodwill of $56 million was recorded in connection with these acquisitions. In addition, Merrill Lynch sold a U.S. residential real estate services subsidiary and a New York Stock Exchange specialist subsidiary, recognizing pre-tax gains totaling $138 million.
For acquisitions accounted for as purchases, the operating results of acquired companies are included in Merrill Lynch's results of operations commencing with the acquisition date.
Provision for Costs Related to Staff Reductions
During the 1998 third quarter, Merrill Lynch recognized a $430 million provision for costs related to staff reductions ($288 million after-tax). The provision covered primarily severance costs, but also included costs to terminate long-term contracts and leases related to personnel reductions and resized businesses. The staff reduction program included reductions, through termination and attrition, of approximately 3,400 personnel, or about 5% of the global workforce.At December 31, 1999 the remaining liability was $54 million, which primarily represented severance payments for personnel receiving periodic payments. All staff reductions were fully completed during 1999.
