Bank of America's bac purchase of Merrill Lynch mer will create the nation's largest retail bank even as it signals the end of independence for the 94-year-old brokerage house known for bringing Wall Street to Main Street.
Bank of America's decision to acquire Merrill Lynch in an all-stock transaction — the culmination of 48 hours of frenzied negotiations — will give it the nation's largest retail brokerage network and a sizable investment banking presence.
It's a bold move and a noteworthy reversal for CEO Ken Lewis, who last fall, when steep trading losses in BofA's own investment banking division helped cut the bank's third-quarter profits by almost a third, said he wasn't interested in growing it.
"I've had all the fun I can stand in investment banking at the moment," he told banking analysts in a conference call, according to a transcript.
Lewis was more upbeat Monday about BofA's prospects with the nation's biggest brokerage house in its growing empire. Buying Merrill was the "strategic opportunity of a lifetime," Lewis said.
Investors were less enthusiastic. In a day that saw steep losses in the market, BofA's shares fell 21% to $26.55. Merrill's shares rose a penny to $17.06.
With the bank's shares worth less, that cuts the value of the transaction to less than $40 billion, or about $22 a share, from about $50 billion, or $29 a share, based on Friday's closing prices.
The acquisition is an aggressive move by Bank of America to expand its already gigantic financial footprint only two months after acquiring Countrywide, previously the nation's largest independent mortgage lender. It comes as a growing number of financial institutions are teetering amid a faltering economy and soured real estate investments.
Bank of America is already the largest credit card issuer and mortgage lender. But the merger — expected to close in the first quarter of 2009 — will boost its investment-management business because of Merrill's 50% ownership in BlackRock, a global asset manager with $1.4 trillion under management.
Ladenburg Thalmann analyst Richard Bove, in a research note Monday, called Bank of America's acquisition "a natural fit" because it increases the brokerage sales force by 16,000 and makes the combined company a major stock underwriter. Other analysts were cautious. Moody's Investors Service put some of Bank of America's debt ratings on review for a downgrade, saying the acquisition poses "substantial integration challenges" at a time when the economy remains weak and Bank of America is digesting its purchase of Countrywide, a mortgage lender pummeled by loan defaults.
Quincy Krosby, chief investment strategist at The Hartford, an insurance company, said the sell-off in Bank of America's stock Monday is a sign of "jittery financial markets" and investor concerns about "overall system risk in the credit system."
"What the market is saying is BOA overpaid," Krosby says. "But Bank of America didn't want to risk losing the deal. It wanted to lock in the deal."
But Bank of America has proved skeptics wrong before. When it acquired FleetBoston Financial in 2003 for $45 a share, analysts thought it overpaid. But the deal has generally been seen as a boon to BofA, expanding its presence in the Northeast and then making it the second-largest U.S bank, by assets, behind Citigroup.