BofA’s Purchase Of Merrill Lynch: High Stakes Gamble Or Winning Hand?
Sometimes arranged marriages work out for the best; sometimes they don’t. In the case of Bank of America’s purchase of 94-year-old investment firm Merrill Lynch, a weekend of high-speed discussions and unprecedented market conditions culminated in their $50 billion union. The arrangement surprised Wall Street and investors alike, and has many people asking whether the pairing of these two very distinctly different financial operations will yield long-term success for BofA in the future.
The challenges facing Bank of America are significant to say the least. Before the acquisition this past weekend, Merrill Lynch was swimming in troubled financial waters. The company has taken some $40 billion in write-downs - with another $8.8 billion potentially to come - from failed investments, and reported losses for four consecutive quarters. Its stock has fallen nearly 70 percent this year. And in August, Merrill’s CEO John Thain announced a liquidation of $30.6 billion of toxic collateralized debt obligations (CDOs) at fire-sale prices in an attempt to shore up the company’s strained balance sheet.
With its purchase by Bank of America a seemingly done deal, the threat that Merrill Lynch might meet a similar fate of Lehman Brothers, which declared bankruptcy on Sept. 15, is removed entirely. The deal also positions BofA, a retail-focused bank, to enter the world of global investment banking, making it the nation’s largest financial services company with more than 20,000 financial advisers and $2.5 trillion in client assets.
Still, many perceive the strategy to be a big gamble on the part of Bank of America. On Monday, the day that the acquisition was announced, shares of Bank of America fell more than 20%.
“The market reaction is very clear: The market is absolutely appalled by the deal,” said James Ellman, head of San Francisco hedge fund Seacliff Capital, in a Sept. 15 story in the Houston Chronicle. According to the story, Ellman, who does not own shares of either Bank of America or Merrill Lynch, says the market believes BofA paid too much for Merrill Lynch, a move that ultimately could lead to a number of scenarios, including an attempt to renegotiate the sale price.
The apparent skepticism on the wisdom of the BofA-Merill Lynch union also was seen in recent actions taken by Standard & Poor’s Ratings Services. The ratings agency lowered its long-term credit rating on Bank of America, saying the purchase of Merrill Lynch carries integration risk for the bank, and puts further pressure on BofA’s capital.
Meanwhile, two of the top men in charge at Merrill Lynch stand to make a tidy profit from the firm’s sale to Bank of America. A Sept. 16 story on Bloomberg.com reports that CEO John Thain could pocket $11 million if he does not stay on once the purchase is finalized. Thomas Montag, who’s in charge of Merrill’s global sales and trading division, may be looking at a payout of $30 million in accelerated stock awards and $6.4 million in options.
Both of the payouts are in addition to a $15 million signing bonus Thain received last December and a nearly $40 million bonus Montag is guaranteed to receive this coming January.
Moving forward, a lot is riding on Bank of America’s CEO Kenneth Lewis and his high-stake gamble to acquire the world’s largest and most widely recognized brokerage firm. Only time will tell whether his decision leads to a match made in financial heaven or becomes a union doomed to fail because of incompatibility.
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