-- 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.
Bank of America's latest deal took shape this weekend, as executives from major Wall Street firms huddled with top Fed officials inside the stone fortress-like building of the New York Federal Reserve Bank in Lower Manhattan.
Merrill Lynch Chief Executive John Thain jump-started the whirlwind merger talks when he phoned Bank of America Chief Executive Lewis on Saturday morning to explore the possibility of a merger, the executives told reporters Monday.
Bank of America's adviser, J.C. Flowers, a private-equity firm, had done "quite a bit of due diligence" on Merrill Lynch in recent years, says Lewis, which was "one of the key ingredients in being able to do this as quickly as we did."
Merrill has lost more than $45 billion on its mortgage investments, raising fears that it could be the next bank to go under. The firm was one of the largest issuers of collateralized debt obligations, which are securities that package together mortgage and other debt and are sold to investors.
Merrill however, has taken aggressive steps to reduce its exposure to risky assets, putting it in better shape than some of its competitors. In July, it said it would take a pretax write-down in the third quarter of $5.7 billion, to sell off a chunk of its riskiest investments at a sharp discount.
Lewis says Bank of America, which just Friday had been weighing a purchase of Lehman Bros., turned its attentions to Merrill because it was the "opportunity of a lifetime."
Lehman, unable to find a buyer, filed for bankruptcy court protection Monday morning.
Thain says the merger wasn't the "outcome I would have expected when I took this job," but that it's a win for Merrill shareholders because they'll own stock in the "leading most-diversified financial services company."
The deal's quick turnaround, says Thomas Cooley, dean of NYU's Stern School of Business, also reflects the "volatility in the economy and the fear that others could follow the fate of Lehman."
Lewis is no stranger to large acquisitions. Before the Countrywide purchase — which is still being integrated — Bank of America in 2005 purchased MBNA, mainly known as a large credit card issuer. During Lewis' tenure as CEO, the bank has also bought Chicago-based LaSalle Bank, FleetBoston and U.S. Trust.
Lewis' banking career started in 1969 as a credit analyst at NCNB Corp., a company that eventually merged into the behemoth known as Bank of America. He took the reins of Bank of America in 2001, and has cultivated a reputation for aggressive dealmaking.
Buying Merrill Lynch raises the question of whether the deal would violate banking regulations that say no bank can hold more than 10% of the nation's deposits, says analyst Bove.
Lewis, on a CNBC interview Monday, dismissed this concern, saying that a portion of Merrill's deposits is from thrifts and industrial loan corporations, which are not subject to banking rules.
Would bank be dangerously indispensable?
Still, the bank's growth raises concerns because it is now "one of the few indispensable titans of the world," says Peter Schiff, president of brokerage firm Euro Pacific Capital and author of Crash Proof: How to Profit from the Coming Economic Collapse.
By buying Merrill, Bank of America has made itself "too big to fail," at a time when other weakened financial institutions are seeking government assistance, Schiff says.
The deal won't solve all of Bank of America's troubles. Lewis said Monday that he doesn't expect the economy to begin recovering until the second half of next year.
"I don't see the clouds parting, as I would like them to, in 2009," Lewis says.
But Anthony Polini, an analyst at Raymond James, says the merger was the best option for Merrill. Had the deal not been arranged this weekend, shares of Merrill likely would have plunged and severely reduced the price any buyer would be willing to pay, Polini says.
Also, Polini says, the weak economy has allowed Bank of America to capitalize on a rare opportunity to pick up assets at prices some wouldn't have expected years ago.
As the economic turmoil continues, more troubled institutions will be under pressure to strike deals with larger and better-capitalized firms.
"It is definitely a very, very difficult time and it's not going to get better quickly, but it will eventually, and we will be well positioned when it does," Thain said Monday.
Adds Lewis: "There are going to be fewer companies, and we're going to have to be better at what we do."