Predicting a Firm's Financial Distress: The Merrill Lynch Co. Statement of Cash Flows
During the night of September 14, 2008, a few hours before Lehman Brothers folded, Merrill Lynch declared defeat: it was acquired by Bank of America (BofA). Unsure of its ability to continue as a stand-alone entity, Merrill Lynch deliberately ended 90 years of independence. Before its buyout by BofA, Merrill Lynch was the world's largest and most widely recognized stockbroker. It dominated retail stockbroking with its army of 16,000 brokers around the world. At the start of 2008, Merrill Lynch, Goldman Sachs, Morgan Stanley, Lehman Brothers and Bear Stearns were the five largest stand-alone investment banks, with a combined total history of 549 years: within the span of six months, they would all be gone.
The numerous bankruptcies and the financial difficulties experienced by American banks and several financial institutions in 2008, a phenomenon that had been overlooked in the analysts’ forecasts, point to shortcomings in existing financial analysis techniques. A key question is the following: What is the informative value of the statement of cash flows in predicting the financial distress of a company?
This case is intended for MBA or undergraduate students (future managers, investors or auditors) to make sense of cash flows statements and to look at companies’ performance beyond statement of earnings. More precisely, the aim of this case is to enhance the informative value of cash flows by doing a thorough analysis of the statements of cash flows disclosed in the three years preceding the 2008 financial crisis by Merrill Lynch & Co.
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