Bank of America Corp Chief Executive Officer Kenneth Lewis’s takeover of Merrill Lynch & Co, the capstone of more than $100 billion in acquisitions he’s made since 2001, may prove the hardest to digest.
He will generate fees from Merrill’s 16,850-strong sales force and says he can slash $7 billion of costs with the combination, likely to be approved by shareholders on Friday and to close by the end of the month. The firm’s $2.8 trillion of assets would vault it over Citigroup Inc and JPMorgan Chase & Co as the Number one US bank. Lewis, 61, called Merrill “the ideal long-term fit” when the deal was announced on September 14.
Bank of America shares have dropped 58 per cent since the all-stock purchase was struck, and Merrill is down 30 per cent, valuing the $50 billion deal at $19 billion. Citigroup analyst Keith Horowitz wrote on December 2 that the firms may have combined writedowns of $5.1 billion in the fourth quarter and had $56 billion of “high-risk” assets at the end of September.
“There are some hand grenades on the balance sheet that are going to blow up on Bank of America,” said James Ellman, a former Merrill Lynch money manger who is now president of San Francisco-based SeaCliff Capital LLC. “The cost savings are going to be nowhere near what they’ve already promised.”
The sagging economy has also hurt. Three months after striking a deal with John Thain, CEO of New York-based Merrill, on the same weekend that Lehman Brothers Holdings Inc sank into bankruptcy, Lewis said on December 3 that his own bank’s outlook was too optimistic.
“If someone had told me a year ago that things would be worse in December 2008 than in December 2007, I would have thought that person was half crazy,” he said at a conference in Charlotte, North Carolina, the bank’s hometown. Lewis doesn’t expect a recovery until the second half of 2009.
