Bank of America Corp, the biggest US consumer bank, agreed to acquire Merrill Lynch & Co for about $50 billion as the credit crisis claimed another of America’s oldest financial companies.
Bank of America will pay $29 a share for New York-based Merrill in stock, 70 per cent more than the September 12 closing price, the company said in a statement today. Merrill, battered by $52.2 billion in losses and writedowns from sub-prime-mortgage- contaminated securities, has plunged more than 80 per cent from its peak of $97.53 at the start of last year.
The takeover ends 94 years of independence for Merrill and gives Charlotte, North Carolina-based Bank of America a sales force with 16,690 brokers who manage $1.6 trillion for customers. Merrill, led by Chief Executive Officer John Thain, was in danger of becoming the next sub-prime casualty after Lehman Brothers Holdings Inc filed for bankruptcy court protection earlier today.
“If Bank of America can put a fence around the bad assets, that retail distribution is a powerhouse,” said Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors in Cincinnati, which oversees $16.5 billion in assets. “The Merrill Lynch combination makes more sense than a Lehman deal.”
Merrill is the second bargain picked up this year by Bank of America Chief Executive Officer Kenneth Lewis tied to the collapse of the mortgage markets. The bank bought Countrywide Financial Corp for $2.5 billion in stock last July to become the nation’s biggest home lender. As recently as September 12, Bank of America was considering making a bid for New York-based Lehman.
Stock Swap: Each Merrill share will be exchanged for 0.8595 shares of Bank of America stock, according to Bank of America’s statement. That works out to $29 a share, based on Bank of America’s closing price of $33.74 on September 12. Because the payment is in stock, Merrill shareholders would get less if Bank of America's share price falls. The deal is scheduled to close in the first quarter of next year.
Bank of America slumped 13 per cent to $29.50 in German trading and Merrill gained 37 per cent to $23.30.
“Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders,” Lewis, 61, said in the statement. The Merrill takeover would be the largest in the financial-services industry this year, data compiled by Bloomberg show.
It’s the fifth-largest transaction since Bank of America bought FleetBoston Financial Corp in 2003 for about $48 billion in 2003.
‘Mr Fixit’: The deal would mark the end of Merrill’s almost century-long history as an independent company. According to Merrill’s website, founder Charles Merrill solidified his reputation by advising clients to sell stocks prior to the crash of 1929. The firm went public in 1971 and in 1974 introduced its corporate logo — a bull that Merrill executives say embodies one of the most recognisable brands in the world.
Merrill’s stock returned more than 13 per cent a year from 2000 through 2006. Then last year, the housing market began to falter, and investments linked to the sub-prime mortgage market made under then-CEO Stan O’Neal tumbled in value. The firm posted a loss of more than $2 billion in last year’s second quarter, and O'Neal was dismissed in October 2007.
The board replaced him with Thain, 53, a former Goldman Sachs Group Inc executive who earned the moniker “Mr Fixit” for his stewardship of the New York Stock Exchange for four years beginning in January 2004. Thain took over December 1.
BlackRock Stake: Lewis has made more than $100 billion of acquisitions since becoming CEO seven years ago, including the purchases of FleetBoston and credit-card issuer MBNA Corp.
In Merrill’s case, he’s buying assets worth more than $40 a share, according to a September 12 Citigroup Inc analysis. The wealth management unit alone is worth $16 a share, said the report by Prashant Bhatia.
Merrill also owns about half of BlackRock Inc, the New York-based money-management company that had a market value of $24 billion as of September 12.
Bank of America employed about 207,000 people at midyear, compared with Merrill Lynch's 61,900.
“The fact that the biggest brokerage would be bought by the biggest retail bank is certainly historic,” said John Medlin Jr, 74, retired chief executive officer at Wachovia Corp “Bank of America decided they weren't going to take on the Lehman risk, but they concluded the risk wasn't as severe at Merrill Lynch”.
‘Big Cuts’: Bank of America paid $3.3 billion in July 2007 for US Trust Corp. to expand its wealth management business. The company had $589 billion in assets under management as of June 30 and its full-service brokerage, Banc of America Investments, employs about 5,600 financial advisers. The wealth management business contributed 14 per cent of Bank of America's profit last year.
The bank said today it expects to cut $7 billion of costs by 2012.
“B of A is known for making big cuts,” said John Challenger at Challenger, Gray & Christmas Inc, the Chicago-based placement firm. “They go in and thin it out,” moving some functions to the bank's headquarters, he said.
Fusing the two companies' investment banks transforms Bank of America into a bigger player in several of Wall Street's most lucrative businesses, CreditSights Inc analyst David Hendler said yesterday in a report.
Merrill is the world's sixth-biggest adviser on corporate mergers this year and Bank of America ranks 18th, Bloomberg data show. Together, Bank of America would climb to ninth, according to the statement. Bank of America is the biggest arranger of US loans to companies with junk credit ratings, or those below investment grade. Merrill is the third-biggest stock underwriter.
Securities Unit Shakeup: The Merrill purchase comes less than a year after Lewis, frustrated by proprietary trading losses at his company, said on a conference call, “I've had all the fun I can stand in investment banking” and vowed to scale back the unit.
While he later said he regretted the comment because it made clients question his commitment to the business, Lewis replaced the head of investment banking and eliminated staff, citing slower demand for many capital markets businesses. He promoted former wealth management division leader Brian Moynihan as president of the corporate and investment bank.
Moynihan has recruited more than two dozen people since March, including senior investment bankers and analysts from Bear Stearns Cos, Morgan Stanley and other Wall Street firms. The hires include David Glaser, former co-head of investment banking at Bear Stearns, and David Flannery, former head of leveraged capital markets at Deutsche Bank Securities.
Trading Losses: “It’s a puzzle that Ken Lewis said he didn't want to be in the investment banking business and here he is jumping in with both feet,” said Jack Ablin, who helps manage $65 billion as chief investment officer at Harris Private Bank, including shares of Merrill and Bank of America. “Maybe by harnessing the brain power of Merrill they can become a player.”
Lewis's willingness to buy Merrill comes two and a half months after Bank of America completed its $2.5 billion purchase of Calabasas, California-based Countrywide, which was forced to sell due to mounting losses on subprime home loans — the same assets that led to four straight quarterly losses at Merrill. Sub-prime loans go to home buyers with the weakest credit, and defaults are running at record rates.
Because of its trading losses and slumping demand in capital markets, Bank of America’s corporate and investment bank made up 4 per cent of the company’s profit last year, down from 25 per cent in 2006. The company is the dominant US retail bank, accounting for almost 10 per cent of the nation’s bank deposits and about one of every five newly issued home mortgages.
Stock Drops: Merrill posted a $9.8 billion loss in the fourth quarter, and Thain had to sell about $12 billion of equity in Merrill to bolster its capital base. At the time, Thain said he thought Merrill's troubles were mostly behind it.
“We’re very comfortable with our position,” Thain said on Jan 30.
Merrill posted another $6.6 billion of losses in the first and second quarters, and in July Thain announced the sale of $31 billion of collateralised debt obligations for 22 cents on the dollar, resulting in another $4.4 billion of writedowns. With the prospect of more losses — Oppenheimer & Co analyst Meredith Whitney predicted last week Merrill would post a $6.87 billion deficit for the third quarter — the stock plunged 36 per cent to $17.05, adding pressure on Thain to act and avoid the fate of Bear Stearns, which collapsed in March, and Lehman.
“The potential of a Bank of America-Merrill deal is very positive for the market,” said Peter Kenny, a managing director at Knight Capital Group Inc, the Jersey City, New Jersey-based brokerage that handles about $1 trillion of stock transactions a quarter. “It’s a stronger balance sheet, and brings more certainty and confidence in the counterparty of trades.”
