Delivering Shareholder Value

In addition to serving clients, Merrill Lynch is committed to delivering value to shareholders. Towards this end, we are pursuing the following financial targets that we announced in May 2000:

• Pre-tax margin improvement from 19% in 1999 to 24% by end of 2003
  
• Double-digit earnings growth
  
• Minimum return on equity of 18%-20%

We believe that achieving these results, combined with an emphasis on improving the stability of risk-adjusted returns, should deliver significant shareholder value.

Revenue Growth
Providing value-added services to clients is key, and is reflected in revenues. Since going public in 1971, Merrill Lynch has been a growth company, increasing net revenues at a 14% compound annual rate. Positioning the company to benefit from continued secular growth in financial services driven by an aging population, economic and financial deregulation, technology breakthroughs and globalization, Merrill Lynch has established worldwide leadership positions in our Corporate and Institutional, Private Client, and Investment Managers businesses. Attractive underlying growth prospects for each of these businesses as well as opportunities to gain added operating leverage by cross-serving clients favor sustained revenue growth.

Margin Improvement With Double-Digit Earnings Growth
Revenue growth combined with improvement in the pre-tax margin should produce double-digit earnings growth. Pre-tax margin increases would represent a combination of increased revenues and an effective focus on non-compensation expenses, while we continue to invest in the franchise. Key to successful margin expansion is our resource allocation focus that leads to shifting our people, financial, technical and other resources away from areas that offer lower returns or less growth towards those areas that offer more attractive opportunities.

Return on Equity
In addition to strong earnings growth, we seek consistently high returns on equity while maintaining a strong financial position. Achieving this objective relies on efficient deployment of capital and other resources; effective risk management; and sound liquidity, funding, and equity management.

Capital Allocation
We assign each business unit an amount of equity that reflects its risks, both on and off the balance sheet. Our aim is to expand businesses that are expected to earn strong returns, and restructure or exit those that fall short, subject to our overall corporate strategic objectives. We look at returns, taking into account both accounting and cash flow measures of performance, and seek only that growth which is profitable.

Risk and Credit Management
Merrill Lynch's risk and credit management framework seeks to reduce volatility in operating performance and lower our cost of equity. Merrill Lynch strives to limit its risk profile by diversifying risk and revenue sources; enlarging its stable base of recurring, fee-based revenues; and minimizing the break-even point by controlling fixed costs. Other risk management objectives include: continuing to focus trading activities on client-driven business; limiting proprietary risk-taking; and closely monitoring our long-term exposure to illiquid assets. As our operations have become increasingly complex and diversified, we have strengthened our worldwide risk and credit management controls to avoid undue concentrations of portfolio risk with particular attention to market liquidity in today's environment of globally interconnected markets.

Liquidity and Funding
The principal objective of our funding policy is to assure liquidity at all times across market cycles and through periods of financial stress. In managing our funding programs, we maintain alternative sources of funding and back-up credit facilities as a contingency. We also enhance liquidity by ensuring that sufficient long-term debt and equity are in place relative to less liquid and non-marginable assets. We manage the interest rate and currency exposures of our assets and liabilities, and we diversify our funding sources, including deposits, globally to minimize our overall cost of funding.

Equity Planning
Our objective for the firm's capital is not a specific numerical target for "leverage," but rather a level of capital consistent with a double-A credit quality. Leverage ratio results will depend on the mix of business activities and assets, so that a less risky profile will accommodate a higher leverage ratio. With today's many opportunities worldwide, Merrill Lynch seeks to ensure that it has a strong and flexible capital structure.

Performance Based Compensation
Profitability objectives and shareholder interests are firmly embedded in our compensation structure. We tie incentive compensation to both Merrill Lynch's earnings and return on equity, key components for calculating economic profit. To align further the financial interests of key managers and producers with those of shareholders, we pay a significant portion of total compensation in stock-based programs.

Shareholder Returns
Merrill Lynch seeks to deliver returns to shareholders through appreciation in the common stock price and cash dividends. While in the short term Merrill Lynch's common share price is subject to market conditions, we believe that over the longer term, profitable growth governs price performance. The price of a Merrill Lynch common share increased 64% during 2000 and at a 40% compound annual rate over the last five calendar years. Our quarterly cash dividend has increased six times over the last five years, from $0.065 to $0.16 per share, consistent with our objective of maintaining a competitive market yield, considering conservative increases that do not impair capital planning flexibility.

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