July 21 (Bloomberg) -- Thomas Montag got rich at Goldman Sachs Group Inc., where he tripled the company's profit in Japan in two years. He'll soon be $39 million richer, thanks to an offer from Merrill Lynch & Co. Chief Executive Officer John Thain.

Merrill shareholders and employees are waiting to see whether Montag, 51, who starts work as head of trading and sales on Aug. 4, is worth the $39 million bonus that Thain, 53, agreed to give his former Goldman colleague. Montag also got stock options to replace the Goldman ones he had to forfeit for joining Merrill. Those were valued at about $50 million when the deal was struck, said a person with knowledge of the matter.

``People will wonder why this company is spending more than $80 million on an individual, when the high fees they've paid out to executives up to this point have not gotten any benefit for shareholders,'' said Richard X. Bove, an analyst at Ladenburg Thalmann & Co. in Lutz, Florida, who rates Merrill shares ``sell.'' He says he doesn't think Montag will have any impact on shares of the third-biggest U.S. securities firm.

In his 22-year career at Goldman -- including a seven-year stint overseeing fixed-income, currency and commodity trading in Asia -- Montag never faced a challenge like the one he's taking on. New York-based Merrill reported a second-quarter net loss of $4.65 billion last week, its fourth straight quarterly loss, after taking $9.7 billion in credit-market writedowns.

Waiting for Montag

Merrill still holds about $20 billion of collateralized debt obligations, the subprime-mortgage-linked securities that accounted for half of the firm's $41 billion of writedowns in the past year. It also has $18 billion of commercial real estate holdings and $7.5 billion of junk-grade corporate loans and commitments, which are vulnerable to further writedowns.

The company's shares, down more than 30 percent since Montag's hiring was announced on April 28, rose 16 cents to $31.07 at 12:31 p.m. today in New York Stock Exchange composite trading.

``It's impossible to answer that question,'' said Morningstar Inc. analyst Ryan Lentell, when asked how long it would take for Montag to earn his keep. ``I wouldn't want to focus just on him. There are so many other things at Merrill that need to be done. Basically, they need to get a handle on risk throughout their trading book, and then just start rebuilding.''

That rebuilding has been on hold pending Montag's arrival. Decisions about business strategy and staffing have been delayed until he can approve them, current and former employees say.

Turmoil at Merrill

Merrill hasn't had an executive overseeing sales and trading firm-wide since Dow Kim, 45, appointed by former CEO Stanley O'Neal, stepped down in May 2007 to start a hedge fund. Merrill later partly blamed Kim for the firm's trading positions and rescinded its offer to invest in his fund.

Rohit D'Souza, 43, who had overseen Merrill's stock-trading business since 2004, quit in April, partly because Thain didn't consider him for the job Montag got and partly because of the slow pace of decision-making, according to people who have spoken with him. Merrill still hasn't named his replacement. More than two dozen senior traders and managers have quit or been forced out since Thain took over Dec. 1.

``The sales and trading desk has been lying around headless, while they were waiting for this guy,'' said Adam Compton, senior research analyst at RCM Capital Management LLC in San Francisco, which oversees $150 billion and sold its last 38,500 Merrill shares earlier this year.

Vespa, Wolfgang Puck

One of Montag's first tasks may be deciding which jobs to cut, a move that risks further alienating already anxious employees, Compton said.

``His first order of business is going to be building confidence and getting everybody on board,'' Compton said. ``It's a people business, and the last thing you want to do is have the best people leave. He's probably got to stabilize that aspect of it. But he's got to cut costs too.''

Thain, in a July 17 conference call with reporters, said he hadn't decided whether job cuts will be necessary.

Montag, who declined to be interviewed, brings both panache and pedigree to the job. Known to friends as ``Monty,'' he spent most of the past decade in Japan, where he commuted to work by Vespa and frequented Wolfgang Puck's restaurants, according to friends. Two years ago, as he approached his 50th birthday, he shed more than 50 pounds, shocking friends by the loss of body mass.

The Goldman Touch

Montag returned to New York in 2006 to oversee sales and trading in the Americas, after helping Goldman become Japan's most profitable foreign securities firm, according to data compiled by the Tokyo-based Financial Services Agency. He left Goldman at the end of November having been passed over the previous year in the firm's corporate succession.

``Tom is extremely personable, extremely quick, very smart and good analytically,'' said Steve Duncker, a former bond- trading executive at Goldman who attended Northwestern University's Kellogg School of Management with Montag. ``Peers who were direct reports of his universally rave about him as a manager and a leader.''

Some of Montag's luster comes from being a Goldman alumnus. New York-based Goldman, the biggest U.S. securities firm by market value, has mostly avoided subprime-mortgage losses. Its stock has fallen 15 percent in the past year -- one-third the decline of Morgan Stanley, its closest competitor among U.S. securities firms.

More Than Blankfein

Merrill plunged 63 percent during the same period in New York Stock Exchange composite trading, and Lehman Brothers Holdings Inc. dropped 73 percent. Bear Stearns Cos., once the fifth-biggest U.S. securities firm by market value, collapsed in March and was forced to sell itself to New York-based JPMorgan Chase & Co., the biggest U.S. bank by market value.

``Clearly, of the large broker-dealer shops, Goldman has best worked out how to manage risk versus return,'' RCM's Compton said. ``Can you translate that to another shop, where the history and the culture have been different? That's the question.''

Thain, who declined to be interviewed, was so taken by Montag that he agreed to give him a bonus more than twice the $15 million he received upon coming to Merrill in December. Montag's $89 million package is almost twice the $48 million awarded to former Merrill CEO O'Neal in 2006, the most profitable year in the firm's 94-year history. It also exceeds the $68.5 million that Goldman CEO Lloyd Blankfein earned in 2007.

Montag, who will get an annual salary of $600,000, has no guarantees of future bonuses.

`Overwhelm Them'

``His first priorities will be to assess the current team, to determine how he wants to be organized and who he wants to be the leadership in the various parts of the business,'' Thain said on the July 17 conference call. Then, Montag has to focus on ``how to make money and how to continue to manage down our risk,'' Thain said.

Bove of Ladenburg Thalmann said Thain should spend more time on attending to Merrill's customers than on hiring high- priced talent from Goldman.

``You overwhelm them with calls, you overwhelm them with research, you overwhelm them with visits and contacts, and if you execute trades for them in a reasonably appropriate fashion, you will get business,'' Bove said. ``You don't need some high- profile big-hitter unless you're going to go into the proprietary trading business, which in my view is not a good idea for Merrill.''

Capital is so tight at Merrill that Montag won't be able to make the same debt-leveraged trading bets that most Goldman partners are accustomed to, Compton said.

$38 Million Townhouse

``He has a tough job, figuring out how you create value on the big sales and trading desk,'' Compton said. ``You can't just wave a magic wand. You've got to get your costs in line with the revenue you can realistically produce, and it's not going to be the kind of revenue you used to generate.''

Montag hasn't had trouble giving away or spending the capital he accumulated while at Goldman. In 2002 and 2003, he donated $2 million to Beaverton High School near Portland, Oregon, where he played football, basketball and baseball. He gave $1.4 million to his alma mater, Stanford University, to buy a state-of-the art scoreboard. He contributed $2 million for a student center at Willamette University in Salem, Oregon, the school his parents attended.

He has a second home on Hawaii's Big Island, and the New York Observer reported Feb. 26 that he agreed to buy a six-story townhouse listed for $38 million on New York's Upper East Side.

Those past successes don't mean much to Meredith Whitney, an Oppenheimer & Co. analyst who rates Merrill shares ``underperform.''

``It's great to have more smart guys around,'' Whitney said of Montag in an interview. ``But he's not a panacea. There are still too many market issues Merrill has to deal with.''

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: July 21, 2008 12:33 EDT