Talk about a shotgun wedding. From the Wall Street Journal (hat tip reader Saboor):
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…
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…..
Yves here. Ahem, does anyone now think the value a year ago represented the real value of the firm?
“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.”….
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….
As of Sunday evening, a deal had not yet been signed….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…..
“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.”
As we have said often, publicly-held investment banks are a bad business mode. The loss today of two once proud firms is testament to the danger of taking what might have seemed a good idea beyond its point of maximum advantage.
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“Why would Bank of America do this?”
It had a very special invitation to today’s Fed Sunday Brunch and it will have a very fine Fed backstop. What that means for future profits remains to be determined; but regulated banking will be saved. There will be some very angry hedge fund managers; but the Fed sent innumerable warnings that were ignored.
Yves, thank you for this fine blog.
I wonder if the FTC will care that the #1 deposit holder in the US is also the #1 (subprime) mortgage underwriter by way of acquisition and now the #1 securities broker/dealer by way of acquisition.
Why is Congress out of the loop and FTC not involved in this real-time on-the-fly activities to distort, disrupt and manipulate commerce? Treasury is out of control and Id like to know why we don’t have Enron-like investigation going now??? WTF is going on here?
What happens when BofA fails?
Seems like the proverbial battle line has been brought back about 100 miles.
What about wachovia? They were probably within that 100 miles.
BofA is trying to become too big to fail.
Yves, what’s your thinking of the likelihood of this deal completing? It’s a $10 premium to Friday’s close. Seems like it’s designed to destroy the shorts, but if I were short, it would smack of desperation. If MER loses another $10, the deal will be repriced.
Yeah, it makes you wonder who is running this Country. All this activity is more like a financial coup.
I know the US Treasury is going to hide true values of the GSEs using the Fed Reserve as the bank and its hidden accounting sheets.
I believe it will get repriced but thain wanted to avert the stock getting crushed tomorrow.
All this smells. If BAC was concerned about share holder value, then they would wait and allow MER to get crushed tomorrow. Instead they put up 44 billion when perhaps they could have bought it for half that.
Some institutions are to big to fail but that doesn’t mean they won’t.
I question whether BAC can survive. If unemployment starts to soar, then BAC is toast. What is their international exposure? How does it compare to other banks?
two questions to anyone listening.
Bill Gross called the merrill/boa merger a ‘rumor’ and that BofA was ‘unlikely’ to have agreed to such a high price with short notice.
Also…
Its 12:05am. do you know where your LEH bankruptcy is?
I think this story is still alive.
Fascinating comment, bg. The premium for MER does seem absurd, but then again, Ken paid up for Countrywide when he could have just bought the relevant assets out of bankruptcy.
Ben and Hank will clearly not let B of A go out of business, but that doesn’t mean that shares couldn’t lose 60% of their value over the next three months, as people become a little more sensitive about balance sheet chicanery. The same is true for Wells Fargo.
don’t forget plenty of us figured out a long while back that the big picture is….”reflate”…. The sad only solution to the collapsing bubble of credit, since deflation vs debts is such a killer.
So….it’s inflation that’s the answer and the constant gradual plan.
On the bright side, this buyout will cause some pretty serious losses by those who believed that perpetually betting against the competence of rising star Federal Reserve Geithner was risk free.
If B of A ever gets in a jam, the Fed will not forget this transaction in its treatment of them.
This transaction is the only bright spot in a day that has been full of bad news. It should be a stabilizing factor in the markets and help to support a hard landing instead of a crash.
Matt Dubuque
ya…for anyone with liquid assets that exceed the FDIC deposits/SIPC limits, you now know where to keep your money.
The banking part of B of A was in hiring freeze mode almost 2 years ago, but for obvious reasons never made a public deal of it. Commercial bankers have access to some pretty good real time information.
Whether they can swallow all this garbage is another matter.