Bank of America Reaches Deal for Merrill

[brownsfan019 17]

http://online.wsj.com/article/SB122142278543033525.html?mod=mktw

 

Bank of America Reaches Deal for Merrill

By MATTHEW KARNITSCHNIG, CARRICK MOLLENKAMP and DAN FITZPATRICK

September 15, 2008

 

In a rushed bid to ride out the storm sweeping American finance, 94-year-old Merrill Lynch & Co. agreed late Sunday to sell itself to Bank of America Corp. for roughly $44 billion.

 

The deal, which was being worked out in 48 hours of frenetic negotiating, could instantly reshape the U.S. banking landscape, making the nation's prime behemoth even bigger. The boards of the two companies approved the deal Sunday evening, according to people familiar with the matter.

 

Driven by Chief Executive Kenneth Lewis, Bank of America has already made dozens of acquisitions large and small, including the purchase of ailing mortgage lender Countrywide Financial Corp. earlier this year. In adding Merrill Lynch, it would control the nation's largest force of stock brokers as well as a well-regarded investment bank.

 

A combination would create a bank of vast reach, involved in nearly every nook and cranny of the financial system, from credit cards and auto loans to bond and stock underwriting, merger advice and wealth management.

 

It would also show how the credit crisis has created opportunities for financially sound buyers. At $44 billion, or roughly $29 a share, Merrill would be sold at about two-thirds of its value of one year ago, and half its all-time peak value of early 2007. Merrill shares changed hands at $17.05 each on Friday, after falling sharply in the wake of Lehman's looming demise.

 

"Why would Bank of America do this?" said analyst Nancy Bush at NAB Research LLC in Annandale, N.J. "Ken Lewis always likes to buy the biggest thing he can. So why not this? You are master of the universe, basically."

 

Bank of America and Merrill Lynch wouldn't comment on any discussions.

 

Merrill would give Bank of America strength around the world, including emerging markets such as India. And Merrill is also strong in underwriting, an area Bank of America identified last week at an investors' conference where it would like to be more aggressive.

 

Dramatic Deal

 

A deal would be all the more dramatic because Merrill, upon the arrival of Chief Executive John Thain, did more than many U.S. financial giants to insulate itself from the financial crisis that began last year. It raised large amounts of capital, purged itself of toxic assets and sold big equity stakes, such as its holding in financial-information giant Bloomberg. That Merrill has opted to sell itself thus underscores the severity of crisis.

 

The integration of Merrill, known for its proud, and sometimes testy, brokerage force, could turn out to be the biggest test of Mr. Lewis's career. Typically, the bank has made one big deal and then taken time to carefully merge the two institutions. But in recent years, acquisitions have come at a furious pace. In 2004, the bank bought FleetBoston Financial Corp. A year later, the bank agreed to buy MBNA Corp., the credit-card firm. In 2007, Bank of America bought Chicago's LaSalle Bank as part of the break-up of Dutch bank ABN-Amro Holding NV. Then came this year's purchase of Countrywide.

 

As of Sunday evening, a deal had not yet been signed, said people briefed on the discussions. And other last-second bidders could emerge from the woodwork. Yet with news of the Bank of America talks breaking Sunday, it became all the more difficult for Merrill and Mr. Thain to rebuff a deal. Should the talks collapse, most on the Street were expecting Merrill's shares to fall even further amid widespread worries about independent broker-dealers.

 

Inside the Fed meetings in Lower Manhattan this weekend, there was a general worry that Merrill could be the next to fall after Lehman. Through the weekend, federal officials including Federal Reserve Bank of New York head Timothy Geithner made it clear that they strongly encouraged a deal to sell Merrill, said people familiar with the matter said.

 

If struck, a deal would come together at breakneck speed. On Friday, Bank of America's top executives were pushing for a deal with Lehman Brothers, scrambling to perform due diligence on Lehman's books. Just 48 hours later, they were locked in discussion with Merrill and its top executives.

 

During the flurry of historic dealmaking this weekend, Merrill approached Morgan Stanley about a possible deal, which would have united two of Wall Street's oldest brands, according to a person familiar with the talks. But the talks didn't go anywhere because there wasn't enough time for Morgan Stanley to review the idea and Merrill wanted to do the deal quickly, this person said. Merrill was also stepping up talks with commercial banks both in Europe and the U.S. While Mr. Thain had once orchestrated a trans-Atlantic deal for his old firm, NYSE Euronext, in this race, a U.S. deal proved the quickest, best option for Merrill.

 

'The Ultimate Realist'

 

"I think John Thain at Merrill is the ultimate realist," Ms. Bush said, the analyst, who expected federal regulators to bless the deal by relaxing deposit limits for bank-holding companies. "He knows if Lehman goes under he is not far behind. He wants to cut the best deal he can."

 

In the past 15 months, Merrill and Lehman have both had tens of billions of dollars worth of risky, illiquid assets carried on balance sheets that were leveraged at a debt-to-equity ratio of more than 20 to one. When the credit crunch hit in mid-2007, the assets kept deteriorating in value and couldn't easily be sold, eating into both firms' capital cushion. Recently, Lehman's balance sheet topped $600 billion and Merrill's $900 billion.

 

Merrill's one-time chief Stan O'Neal was ousted in October 2007, and his successor, Mr. Thain, tried to repair the firm's balance sheet by arranging an infusion of more than $6 billion in capital starting last December by investors led by Temasek Holdings, a Singapore government investment fund.

 

But as the losses kept coming this year, Mr. Thain was forced in July to sell a huge slug of more than $30 billion in collateralized debt obligations at a price of just 22 cents on the dollar. That step required the firm to raise still more capital, under painful terms that re-priced some of the December stock sales at about half the original price.

 

One top Merrill executive lamented the pending sale of the venerable company, saying "it's sad but inevitable." This executive said that he was pleased it was Merrill, rather than rival broker Morgan Stanley, that was hatching a deal with Bank of America.

 

The fate of both Morgan Stanley and Goldman Sachs will be front and center Monday morning, as the Street wakes up to a world where the independent broker-dealer are increasingly thin in number.

 

This tumultuous year has made it clear that investment banks like Lehman and Bear Stearns face vulnerabilities that commercial banks such as J.P. Morgan and Bank of America are less prone to. The investment banks must constantly depend on short- and medium-term money markets to fund their operations. Commercial banks, meanwhile, can count on more stable consumer deposit bases.

 

In a highly volatile market, some advantages accrue to banks that can rely on those more stable deposit bases.

 

At Merrill, "we became convinced that for investment banking to be possible, we need to be part of a much bigger capitalized commercial bank," the Merrill executive said.

 

Merrill acted to avoid the same fate as Bear Stearns and Lehman, some analysts said. "Bear didn't think it could happen to them and Lehman didn't think it could happen to them either," said analyst David Trone of Fox-Pitt, Kelton. "I think management looked at Bear and Lehman and said we're not going to go down that slope, we're going to try and get our shareholders something before we end up in the same camp."

[brownsfan019 17]

So how long before BOA owns the entire US monetary system?

 

Wow...

 

Another huge deal for them.

[james_gsx 16]

Where the hell did this come from? Friday night it seemed no one would talk to Lehman, and now MER is running for safety?

 

Now I have to ask, is cash in a brokerage account or bank really "king"?

[brownsfan019 17]

Very interesting purchase for BOA indeed. Having been a broker for a few years, I'm a bit surprised that Mother Merrill was sold when there was no talk of her being up for sale.

 

I think the financial industry is doing a big circle - we started with many different banks, brokers, etc. during an economic boom; now it's time to consolidate and get rid of the weak hands (or cash in if you can); and then I think we may see the startups show up again. Regionalized banks are quickly becoming a thing of the past, but I think consumers will miss that personal touch and we may see smaller, personalized banks make a run again. And then the big boys will gobble them up again. All the while making the people that start them very wealthy...

 

I've actually toyed w/ the idea of starting a local credit union. I've always liked the concept and if it's financially feasible, I think it could be a good career option for me. I've always enjoyed working w/ the public and a credit union is a bit more relaxed vs. a fixed structure of a bank. No idea what goes into it though. Never looked into it. Could be fun to trade while running a relaxed credit union that is pretty basic - bring deposits in, loan money out and hopefully do it the right way.

[james_gsx 16]

I think you can definitely do something like that and make it work. Just focus on a few key areas that will keep you unique and valuable to customers for a long period of time. Something like personalized customer service in a wealthy area, I think it could definitely work. Just build your network with some wealthy clients and keep them happy.

[brownsfan019 17]

I think it's possible James, but no idea what goes into getting it up and running. That's the hurdle that I'm not interested in facing right now. If someone else did the leg work, I'd be more than happy to consider running it and being a part owner in the operation.

[manojjonam10 10]

Well, it is a good move in stabilizing the market to a certain level. I wonder if companies are sold to sovereign investment countries what effect it will have on US economy.