Kenneth Lewis’s purchase of Merrill Lynch & Co, the deal that was supposed to cap his career as Bank of America Corp’s master builder, may wind up derailing it.
Bank of America, the largest US bank by assets, dropped 15 per cent in New York trading on Thursday as Lewis ousted former Merrill Chief Executive Officer John Thain three weeks after the transaction closed. The bank is worth $36.3 billion, a fraction of the more than $100 billion Lewis spent on acquisitions since he became CEO in 2001. Its quarterly dividend is a penny a share, down from 64 cents six months ago.
“This deal could cost Lewis his job eventually,” said Ralph Cole, a money manager at Ferguson Wellman Capital Management Inc in Portland, Oregon, which sold almost 361,000 Bank of America shares in the third quarter. “They will give him more time to work this out, but everything is moving so quickly.”
Lewis, 61, bought Merrill, the largest US brokerage, and Countrywide Financial Corp, the biggest mortgage lender, at the height of the credit crisis on a bet that he could turn them around as the economy improved. Instead, home prices keep falling and credit markets haven’t thawed. This month, Merrill disclosed a $15.4 billion fourth-quarter loss, forcing Bank of America to seek more government assistance, swelling its tab from the US Treasury to $45 billion.
Charlotte, North Carolina-based Bank of America was counting on Thain, a 53-year-old former Goldman Sachs Group Inc executive who later ran the New York Stock Exchange, because of his Wall Street reputation, analyst Jefferson Harralson of Keefe Bruyette & Woods said in a Bloomberg TV interview.
The executive’s departure “adds a lot of concern about the integration and retention of employees,” he said.
Lewis and Thain weren’t available for comment, according to spokespeople. Calls to Temple Sloan, Bank of America’s lead outside director, and other board members weren’t returned.
Thain’s tenure ended after the unexpectedly large fourth- quarter loss. Merrill had also moved up bonuses paid to its executives in late December, prompting an investigation by New York Attorney General Andrew Cuomo, a person familiar with the probe said. Merrill normally paid bonuses in January or February.
Lewis began to lose confidence in Thain in December, when he learned of Merrill’s loss from members of his own merger- integration team, according to a person familiar with Lewis’s thinking. Lewis indicated that he thought Thain should have been more proactive in keeping him apprised of the results, according to this person.
Lewis was further taken aback early this month, when he learned that Merrill’s investment-banking chief, Greg Fleming, planned to leave for a teaching job at Yale University. Lewis liked Fleming, 45, a 17-year Merrill veteran, and believed Thain had helped to drive him away, the person familiar with his thinking said. Lewis also was put off by the size of bonuses paid to Merrill employees, this person said.
Another person familiar with the matter said Merrill’s loss shouldn’t have been a surprise. Lewis’s transition team at Merrill’s headquarters had access to trading results daily throughout the fourth quarter, the person said. Moreover, Bank of America executives were deeply involved in discussions about year- end bonuses for Merrill employees, according to this person.
Thain’s actions indicate he didn’t see the end coming. In December, at Merrill’s final shareholder meeting, Thain said he wouldn’t have done anything differently during his tenure at Merrill. As recently as January 21, he spent $483,066 to buy 84,600 shares of Bank of America at $5.71 each, a regulatory filing showed.
The next day, at 11:30 am, Thain found himself face-to-face with Lewis, who had flown up from Charlotte, in his 33rd-floor office at Merrill’s headquarters in downtown Manhattan’s World Financial Center. It was the same office previously occupied by Thain’s predecessor, E Stanley O’Neal, who resigned in October 2007 after the firm reported a then-record $2.24 billion loss.
The office had undergone a transformation. Thain spent $1.2 million early last year to redecorate, a person familiar with the matter said. The costs included $87,784 on area rugs and $18,468 on a George IV chair, CNBC reported.
Lewis told investors last week that Bank of America will rebound when the economy stabilises. “This company will generate huge amounts of profit when we get a normal economic environment, not even a great one, just a normal one,” he said on a conference call. Bank of America, which earned an average of $15 billion annually from 2003 and 2007, had a $4 billion profit last year. This week, it began firing employees in Merrill’s investment bank and trading division, under a plan to eliminate as many as 35,000 jobs in the next few years.
Decades of ties between Lewis, who joined the bank in 1969 as a credit analyst, and directors are inevitably strained because of the depressed share price and dividend payout, said Rusty Page, a former investor relations director at Bank of America who worked with Lewis for years.
“Ken’s tenacious, he’s proud and he’s under siege like he’s never been before,” Page said.
The bank named General Counsel Brian Moynihan, 49, to oversee its investment banking and wealth management units.
That continues Bank of America’s tradition of putting its own executives in charge after purchases, said Tom Drew, a Durham, North Carolina marketing executive who has worked on projects for the bank. Lewis last year replaced Countrywide President David Sambol, initially slated to run Bank of America’s mortgage business, with Barbara Desoer, a longtime bank employee.
“Ken is circling the wagons and taking moves to show he’s still in charge,” said Drew.
