Financials
Charlie Gasparino,|On-Air Editor
CNBC.com
Bank of America said it agreed to buy Merrill Lynch 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.
BoFA 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 percent 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.
Merrill plans to make an internal announcement to employees sometime between 8 and 9 a.m. New York Monday.
Merrill came under pressure to find a merger partner came after its liquidity began "evaporating" Friday and the firm became worried about a sharp decline in share price on Monday, according to people inside the firm.
Merrill is expecting huge job losses with the merger. The brokerage division will stay intact, but there will be large-scale reductions in workforce. CEO John Thain is also expected to leave.
"It's over," said one senior Merrill official.
The deal comes as Lehman Brothers Holdingsprepares to file for bankruptcy after failing to find a buyer.
A Merrill Lynch spokeswoman and a Bank of America spokesman could not immediately be reached for comment. (View Charlie's round table discussion of the BoFa purchase of Merrill on the left)
Merrill, stuck with some of the same toxic debt -- much of it mortgage-related -- which torpedoed Lehman's balance sheet, has been hit hard by the credit crisis and has written down more than $40 billion over the last year.
Last month, Thain arranged to sell over $30 billion in repackaged debt securities to Dallas -based private equity firm Lone Star Funds.
"I'm surprised that Merrill Lynch would want to sell at this point," said Bill Fitzpatrick, an analyst at Optique Capital in Milwaukee. "They seem to be taking steps to improve their business. They have sold off a lot of their toxic assets. Merrill seems to be progressing to me."
In spite of these exposures, the bank is seen by some as undervalued, in part because of its massive brokerage business, which analysts have said is worth more than $25 billion.
The brokerage is the largest in the world by assets under management and number of brokers.
Merrill also has about a 45 percent stake in the profitable asset manager BlackRock, worth more than $10 billion.
"It could be a powerful fit," said Rick Meckler, chief investment officer at LibertyView Capital Management in New York.
But he added: " Merrill Lynch has significant exposures and Bank of America would need enough balance sheet to handle that."
Meckler also noted that the due diligence Bank of America would need to do on Merrill's books would be a serious undertaking, 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, investors are ascribing a negative value to the investment bank, implying huge potential embedded losses.
On the other hand, it would not be 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.
— Reuters contributed to this report.
I'm no stranger to the intricate world of finance and mergers, and this article about Bank of America's acquisition of Merrill Lynch in 2008 certainly brings back memories of a tumultuous period on Wall Street. Now, let's delve into the concepts mentioned in the article.
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Acquisition Details: Bank of America (BoFA) acquired Merrill Lynch in an all-stock deal valued at $50 billion. BoFA purchased approximately $44 billion of Merrill's common shares along with $6 billion of options, convertibles, and restricted stock units. The deal was structured to achieve $7 billion in pretax expense savings by 2012, with expected accretive effects on earnings by 2010.
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Premium and Share Price: The agreed-upon price of about $29 per share represented a significant 70 percent premium to Merrill's share price on the Friday preceding the announcement. However, it's noteworthy that Merrill's shares had traded at $50 in May and over $90 in January 2007.
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Approval and Governance: The deal received approval from the directors of both companies, and as part of the agreement, three Merrill directors were set to join the Bank of America board.
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Motivation Behind the Merger: Merrill Lynch faced a liquidity crisis, prompting the need for a merger partner as its share price was expected to sharply decline. The article suggests internal pressure within Merrill to secure a merger to stabilize the situation.
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Job Losses and Leadership Changes: The merger was anticipated to result in significant job losses within Merrill Lynch. While the brokerage division would remain intact, there were expectations of large-scale workforce reductions. Additionally, Merrill's CEO, John Thain, was expected to leave as part of the deal.
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Market Conditions: The broader financial landscape was tumultuous, with Lehman Brothers Holdings preparing to file for bankruptcy around the same time.
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Merrill Lynch's Financial Challenges: Merrill Lynch had been heavily affected by the credit crisis, writing down over $40 billion in the past year. The firm had also sold over $30 billion in repackaged debt securities to Lone Star Funds in an effort to manage its exposure to toxic assets.
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Bank of America's Acquisition Strategy: Bank of America, led by CEO Kenneth Lewis, was known for its bold acquisition strategies. Despite Merrill's exposures and complexities, Bank of America had a track record of quick acquisitions, as seen in its 2005 purchase of MBNA.
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Due Diligence Concerns: Some analysts expressed concerns about the due diligence required for Merrill's complex exposure to mortgage-related securities and other debt instruments. The article highlights the potential challenges Bank of America would face in understanding and managing these exposures.
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Bank of America's Acquisition History: Bank of America, under Lewis, had a history of large acquisitions, having spent over $100 billion since 2004 on various companies, including the notable acquisition of Countrywide Financial Corp.
This period was undoubtedly a challenging one for the financial sector, and the article captures the dynamics of a significant merger amidst a turbulent market environment.
