Purchase of Merrill Fulfills Quest for a Bank
Bank of America’s dream of dominating the brokerage business always seemed to elude it, even after it transformed itself from a regional bank into a consumer banking powerhouse through two decades of big acquisitions.
CNBC Video: Bank of America Chief Discusses DealNow, that dream is on the verge of becoming reality. With its plan to buy Merrill Lynch, Bank of America is adding the most recognized name on Wall Street — and Merrill’s 17,000 brokers — to its empire.
Overnight, the shotgun merger will transform Bank of America into the nation’s largest player in wealth management. It already holds the biggest branch network and is the largest issuer of credit cards, home equity loans and auto loans. In January, it paid $4 billion for Countrywide Financial, the troubled lender that was the nation’s largest mortgage lending and payment collection operation and became a symbol of the excesses of the subprime crisis.
At a news conference on Monday, Kenneth D. Lewis, Bank of America’s chairman, would not discuss possible layoffs or the number of job losses, but he repeatedly praised Merrill’s 17,000 financial advisers, calling them “the crown jewel of the company.”
Earlier, Mr. Lewis explained why he was willing to pay more than $50 billion, or $29 a share, for a company whose stock has been in free fall. Merrill Lynch’s stock closed at $17.05 on Friday, as investors feared it would be the next to stumble after Lehman Brothers’ collapse.
Mr. Lewis said he believed Merrill Lynch was “more likely than not” to survive the current turmoil and that he did not want to wait to make a discount bid and risk losing the opportunity to buy the wealth management giant.
“Merrill had the liquidity and capacity to see this through,” Mr. Lewis said.
Merrill still has $40 billion of real estate mortgage investments and $17 billion in commercial buildings — a potential liability for Bank of America. But the bank’s executives said they had reviewed the marks and that they felt “pretty good” with the progress Merrill had made in marking the assets down. John A. Thain, Merrill’s chief executive, said that the company had further reduced mortgage holdings in the current quarter.
Mr. Lewis has burnished his reputation by gambling on bold acquisitions that turned what was once a regional institution into a national player. A decade ago, it was known as NationsBank when it bought a much larger institution, the Bank of America, and took its name. In 2003, it took over FleetBoston Financial, widening its branch base, and it snapped up MBNA two years later to create the largest American credit card business.
Mr. Lewis’s poker face and flare for the dramatic appear to have paid off with Merrill Lynch. On Friday night, Bank of America had emerged as one of the leading contenders to rescue Lehman Brothers. Just 24 hours later, its interest faded.
Merrill Lynch put itself up for sale as the danger deepened that it could be the next big firm to be crippled on Wall Street. After a series of side conversations with Mr. Thain during emergency meetings over the weekend meant to try to salvage Lehman, Mr. Lewis swooped in as one of the few willing, and able, buyers for Merrill.
If Mr. Lewis has long clamored for the respect of the banking industry’s more established leaders, he appears to have emerged from the deal as one of Wall Street’s white knights.
“Ken Lewis with this transaction just got that much more powerful in the global financial structure,” said Meredith A. Whitney, a financial services analyst. “This is a deal that gets all the things he aspires to acquire — brand, scale and best-in-class businesses.”
Only a year ago, Bank of America appeared to have given up on investment banking after enduring a string of large losses. Mr. Lewis had spent more than $625 million to expand it, only to see all of its trading businesses swamped by red ink.
He cut thousands of jobs in the investment banking operations, reined in its trading activities and ousted close lieutenants who had been in charge of the division. Asked by an analyst if he had a desire to pursue a deal with Bear Stearns, Mr. Lewis shot back: “I’ve had all the fun I can stand in investment banking.”
Whether Mr. Lewis can make the Merrill Lynch deal work is still an open question. While Bank of America is financially strong, huge losses tied to credit cards, home equity loans and troubled mortgages from the Countrywide deal could erode its financial position. Many analysts say that it will need to shore up its balance sheet with additional capital.
Mr. Lewis, who already has his hands full with Countrywide, will also need to manage the absorption of one of Wall Street’s strongest cultures. Bank of America has traditionally been an acquisition machine, imposing its will and cost discipline on the companies it swallows. Merrill Lynch, with its thousands of brokers, has long prided itself on its tradition of being a stand-alone brokerage. Most analysts expect thousands of layoffs.
If it works, the deal could be a major coup for Mr. Lewis. Bank of America will get a stronger equities division and Merrill’s 45 percent stake in BlackRock, the global asset manager, along with the opportunity to offer Merrill’s products in itsbranches.
Merrill could be a crucial source of earnings for Bank of America as it brushes up against a cap on deposits. That has become increasingly important for Bank of America, which needs to find opportunities outside of traditional consumer banking.
Source: http://www.nytimes.com/2008/09/15/business/15bofa.html
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