Washington/New York: Bank of America Corp said it agreed to buy Merrill Lynch & Co Inc in an all-stock deal worth $50 billion, snagging the world’s largest retail brokerage after one of the worst-ever weekends on Wall Street.
The deal came after tense negotiations over the fate of Lehman Brothers Holdings Inc, which triggered concern that market participants would lose faith in other investment banks. Lehman said early on Monday that it would file for Chapter 11 bankruptcy protection.
“It catapults Bank of America into positions of strength in three businesses where they were weak,” said James Ellman, portfolio manager at hedge fund Seacliff Capital.
“Now Bank of America has one of the best and largest retail brokerages in the country, one of the top investment banks in the world, and a large stake in one of the best investment managers in the world,” Ellman said.
Bank of America agreed to pay 0.8595 shares of Bank of America common stock for each Merrill Lynch share. The price is 1.8 times stated tangible book value.
The bank is buying about $44 billion of Merrill’s common shares, as well as $6 billion of options, convertibles, and restricted stock units.
Bank of America said it expects to achieve $7 billion in pretax expense savings, fully realized by 2012, and expects the deal to be accretive to earnings by 2010. The transaction is expected to close in the first quarter of next year.
The price, which comes to about $29 per share, represents a 70% premium to Merrill’s share price on Friday, although Merrill’s shares were trading at $50 in May and over $90 at the beginning of January 2007.
The deal has been approved by directors of both companies. Three Merrill directors will join the Bank of America board.
Stuck with some of the same toxic debt much of it mortgage-related that torpedoed Lehman’s balance sheet, Merrill has been hit hard by the credit crisis and has written down more than $40 billion over the last year.
Merrill also has a stake of about 45% in the profitable asset manager BlackRock Inc, worth more than $10 billion.
Risks for BoA
BofA had little time to complete due diligence of Merrill’s books, a particular concern given the complexity of the company’s exposure to mortgage-related securities and other complex debt.
With the brokerage and the BlackRock shares worth more than $35 billion combined, and Merrill’s market capitalization at around $26 billion on Friday, investors had been ascribing a negative value to the investment bank, implying huge potential embedded losses.
But this is not the first time Bank of America has done a quick acquisition. In 2005, the bank bought credit card company MBNA after less than a week of due diligence, with Lewis saying the company was comfortable with the acquisition because it knew the people and business well.
Bank of America under Lewis has in fact become renowned for large acquisitions and it has spent over $100 billion since 2004 buying other companies.
Most recently it acquired troubled mortgage lender Countrywide Financial Corp and - although many were skeptical about this purchase - veteran analyst Dick Bove said last week the takeover could prove to be a master stroke by Lewis, since the government takeover of mortgage agencies Fannie Mae and Freddie Mac could fuel business for other lenders.