Merrill – Bank of America deal

It has now been confirmed that Bank of America has bought Merrill Lynch for $44 billion.

Originally, Bank of America had been in the running to buy Lehman Brothers but balked at Lehman’s black hole of a balance sheet. The U.S. Government was offering no backstop for a Lehman purchase as it had for Bear Stearns.

Merrill shrewdly dialed up Bank of America, in fear for their own continued existence. They have been able to strike a deal – and at a decent price. Notch one up for John Thain.

Bank of America made a big mistake in buying Countrywide Financial — one that they will regret for years. Buying Lehman Brothers would have been even more disastrous given their exposure to Commercial Real Estate. But, this deal is good for several reasons. It is better for Merrill than BoA though, as it is a premium to book value and the current stock price.

The Merrill deal is much better than a potential Lehman deal.

  • Merrill has a much better Investment Banking franchise (the former BofA and the former Nations Bank that comprise BofA ahave no IBD prowess to speak of.
  • Merrill has much better distribution in its retail brokerage operation. This will be huge in terms of raising capital.
  • Merrill has already booked over $50 billion in writedowns whereas Lehman has less than $20 billion on the books. (see the writedown league tables here)
  • Merrill is not leveraged to Commercial Real Estate like Lehman. This is another bubble that is in the process of popping. You have been warned!

Here is what Bloomberg has to say about the deal.

Bank of America Corp. reached a deal to acquire Merrill Lynch & Co. for about $44 billion, the Wall Street Journal reported, after shares of the third-biggest U.S. securities firm fell by more than 35 percent last week and smaller rival Lehman Brothers Holdings Inc. neared bankruptcy.

The boards of Merrill and Bank of America approved the transaction this evening, the Journal reported, citing unnamed people familiar with the matter.

Discussions about a transaction unfolded after Bank of America, the biggest U.S. consumer bank, and Barclays Plc, the U.K.’s third-largest lender, abandoned talks to buy Lehman earlier today.

The $29 a share purchase price would be 70 percent more than Merrill’s closing price of $17.05 in New York trading on Sept. 12. Such a deal would value the firm at more than $40 billion. Merrill employs the largest U.S. brokerage force.

Bank of America, based in Charlotte, North Carolina, has maintained its AA credit rating as other U.S. financial institutions, including Merrill, faced downgrades. Merrill’s stock plunged last week after Oppenheimer & Co. analyst Meredith Whitney predicted a $6.87 billion third-quarter loss and investors speculated that New York-based Merrill may sink along with Lehman.

“A merger between Merrill and Bank of America is a good idea,” said Richard Bove, an analyst at Ladenberg Thalmann & Co. in Lutz, Florida. “If Lehman fails, the next bank to be attacked would be Merrill. They are attempting to forestall that attack by linking with Bank of America.”

Thain, Paulson, Geithner

Merrill spokeswoman Jessica Oppenheim declined to comment. “We don’t comment on speculation,” said Bank of America spokesman Bob Stickler.

Merrill Chief Executive Officer John Thain, 53, was among the Wall Street chiefs who gathered the past three days for a series of meetings at the Federal Reserve Bank of New York to discuss a resolution for Lehman. U.S. Treasury Secretary Henry Paulson and New York Fed President Timothy Geithner summoned the executives to the weekend meetings.

Bank of America representatives skipped the initial sessions because the bank was bidding for Lehman.

Bank of America has rallied 82 percent since reaching a low on July 15. On Sept. 12, the shares climbed 68 cents, or 2.1 percent, to $33.74 in New York Stock Exchange composite trading.

Merrill shares fell 12 percent on Sept. 12 to $17.05, the first close below $20 a share in a decade.

Bank of America Said to Reach $44 Billion Deal to Buy Merrill – Bloomberg

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