Bank Of America Aquires Merrill Lynch Financial
Monday, September 15th 2008Sept 15, 2008
NEW YORK (Reuters) - Bank of America Corp's $50 billion acquisition of Merrill Lynch & Co Inc marks the end of a storied name in American finance, but also creates the nation's biggest bank by far.
The purchase would end the 94-year independence of Merrill, Wall Street's third-largest bank, and pair it with a banking behemoth that has announced more than $150 billion of acquisitions in the last five years. Bank of America would pass Citigroup Inc, the largest bank by assets, in size.
Merrill shares jumped 19 percent, while Bank of America slid 14 percent at mid-day Monday.
Monday's merger deal came together in less than two days -- after Merrill Chief Executive John Thain called Kenneth Lewis, his counterpart at Bank of America, to propose a combination. The deal came as Thain, other top industry executives and officials from the U.S. Federal Reserve had huddled in emergency meetings in downtown Manhattan over the weekend to mull the fate of Lehman Brothers Holdings Inc.
"We thought this was the strategic opportunity of a lifetime," Lewis, 61, said at a news conference with Thain in Bank of America's new offices in New York. The bank will remain based in Charlotte, North Carolina, Lewis said.
Bank of America agreed to pay 70 percent more than Merrill's closing price Friday. The shares had fallen precipitously in the last week as worries grew that it could become Wall Street's next casualty.
Lehman, the fourth-largest Wall Street investment bank, filed for bankruptcy protection on Monday.
Adding Merrill would more than double the size of Bank of America's investment banking unit, and give it the largest retail brokerage and a dominant position in wealth management. It also would get Merrill's 45 percent stake in the asset manager BlackRock Inc.
Bank of America was already the nation's largest retail bank, credit card issuer and mortgage provider -- following its July purchase of Countrywide Financial Corp.
The disappearance of Merrill would remove the third major New York-based financial services company in less than a year after Lehman and Bear Stearns.
A fourth, insurer American International Group Inc, is scrambling for capital because of losses on its mortgage-related debt.
Merrill shares jumped $3.14 to $20.19, while Bank of America fell $4.86 to $28.88, both on the New York Stock Exchange.
INTEGRATION RISK
Standard & Poor's cut Bank of America's long-term credit rating one notch to "AA-minus," its fourth-highest grade, saying the merger "carries integration risk, particularly since it comes during a period of severe market turmoil."
Moody's Investors Service said it may cut its "Aa2" rating for the bank, its third highest grade. Fitch Ratings affirmed its "A-plus" rating, its fifth highest.
Thain took over Merrill last December, barely a month after the ouster of his predecessor, Stanley O'Neal. Merrill had a $19.2 billion net loss in the last year, and taken more than $40 billion in write-downs.
"This isn't necessarily the outcome I would have expected when I took this job," Thain, 53, said.
But as Lehman talks proceeded, he said, it became clear that "the funding of independent investment banks was going to come under pressure."
Following heavy trading losses, Bank of America's Lewis said last October he "had all of the fun I can stand in investment banking."
But by Monday, he changed his tune, saying Merrill "causes us in an immediate fashion to be a world-class investment bank and not have to build these things out slowly. I actually do like the business at this scale."
The shotgun merger was similar to JPMorgan Chase & Co's agreement to buy Bear in March. Lewis said there was "absolutely no pressure" from the Fed to buy Merrill.
The Merrill sale would leave two traditional, independent Wall Street investment banks -- Goldman Sachs Group Inc and Morgan Stanley.
Lewis plans to cut $7 billion in costs by 2012, but said no decisions have been made about staffing. Bank of America employs more than 250,000 people, while Merrill has said it employs about 60,000. Merrill has nearly 17,000 brokers.
Bank of America plans to keep the Merrill name for the retail brokerage, calling the operation "the crown jewel."
DARK CLOUDS AHEAD
Lewis acknowledged that market conditions will remain tough for financial services companies, with charge-offs unlikely to head lower before 2010. "I don't see the clouds parting, as I would like them to, in 2009," he said.
Bank of America agreed to pay 0.8595 of a share for each Merrill share. The terms value Merrill at $29 a piece, roughly where the shares traded as recently as September 8. Merrill shares peaked near $99 in January 2007.
The bank is buying about $44 billion of Merrill common shares, as well as $6 billion of options, convertible securities and restricted shares.
"Given the highly skittish market, this stabilizes Merrill's prospects at a time when the market is concerned about how much more there is to go," said David Hendler, an analyst at CreditSights in New York.
Bank of America expects the purchase to reduce earnings per share by 3 percent in 2009, but have no effect in 2010. It expects a closing in the first quarter of 2009. Three Merrill directors will join Bank of America's board.
Bank of America has put mergers together quickly before. In June 2005, it agreed to buy credit card issuer MBNA Corp for $34.6 billion after less than a week of talks.
Bank of America's own bankers, Fox-Pitt Kelton Cochran Caronia Waller, private equity firm JC Flowers & Co and law firm Wachtell Lipton Rosen & Katz advised the bank on the merger. The law firm Shearman & Sterling LLP advised Merrill.