Despite concerns, Merrill deal expected to pass

Dec 04, 2008 (The Charlotte Observer - McClatchy-Tribune Information Services via COMTEX) -- BAC | Quote | Chart | News | PowerRating -- Bank of America Corp. put together its plan to buy Merrill Lynch & Co. in a weekend, expanding its stake in investment banking just as the sector was falling off a cliff.

Merrill has lost more than $20 billion since last summer, and dismissed its chief executive last year as toxic subprime investments dragged the company into the red. Charlotte-based Bank of America has watched its shares fall 55 percent since announcing its intended purchase of Merrill in September, along with declines throughout the industry.

Still, shareholders of both companies are expected to approve the merger when they vote on it Friday, one of the final steps to closing the deal. Shareholder advisory firms are also backing the deal, though they say it's partly because voting "no" would bring more uncertainty to a distressed industry.

"In more normal markets, shareholders perhaps would be more willing to challenge (this) transaction ...," said Chris Young, an analyst at RiskMetrics Group, one of the advisory firms. "But these are not normal markets."

But Bank of America chief executive Ken Lewis has long had an eye on buying Merrill, and the deal will make his bank the biggest wealth manager in the country, allow it to reach more high-end clients, and bring stability to Merrill. And Lewis has successfully led his company through other tricky acquisitions in recent years, making it No. 1 in mortgages, credit cards and deposits. "We're good at this," Lewis told analysts when the deal was announced. "This isn't our first time."

Lewis' most recent buy, the July 1 purchase of Countrywide Financial Corp., was also dogged by skeptics. But the California mortgage lender added to Bank of America's earnings immediately. Lewis also faced critics when he bought FleetBoston Financial Corp. in 2004, said analyst Nancy Bush of NAB Research. "It was a company that had more than a few warts, and he paid a big price for it, and it was in a region where people were concerned that he wouldn't be able to compete well," Bush said. "And none of that came true."

Lewis is "a guy who always knows what he's getting himself into," added Walter O'Haire, a California-based banking consultant. "I think they'll be able to make it work."

Bank of America is a relative darling in a battered industry, and its plan to buy Merrill likely saved the once venerable firm from extinction. Though earnings are down, Bank of America is still profitable, and it's adding deposits as nervous consumers flock to a bank with a well-known name. And as its Tryon Street rival, Wachovia Corp., prepares to sell itself to a San Francisco rival, Bank of America will be the single pillar supporting Charlotte's title as the country's No. 2 bank town by assets.

Still, the bank isn't immune to problems rocking the financial sector. Losses on loans to homeowners, credit card holders and small businesses continued to rise in the third quarter, and the bank slashed its shareholder dividend after raising it for 30 straight years.

Even though Bank of America is the victor in this transaction, it's likely to cut jobs at both companies after the merger.

The Merrill deal is expected to close this month or soon after.

Purchase price falling

Bank of America's purchase of Merrill was originally valued at $50 billion, and some analysts worried that it was overpaying. But the purchase price is based on Bank of America's share price, which has fallen by more than half since the deal was announced. Based on Wednesday's closing price, Bank of America would pay closer to $22 billion for Merrill.

But critics wonder if Bank of America should buy Merrill at any price, given its own falling shares and uncertainty about how big Merrill's losses will turn out to be.

"This is buying a racehorse without a veterinarian checking it," said Michael Farr, president of the Farr, Miller & Washington investment firm in Washington, D.C. "You know there's a plague going around, you know there's something wrong with your racehorse, so how much are you going to pay for it?"

Merrill, the 94-year-old investment firm with the distinctive bull logo, was a Wall Street powerhouse for decades but has stumbled following its "orgy of subprime buying," as Bush called it. And some analysts have questioned why Bank of America would want to buy an investment firm after scaling back its own investment banking operations, which have been hurting like most of its peers. But Lewis has also long predicted that commercial banks like his own would eventually buy up investment banks. The banks that combine commercial and investment banking, he said in a speech last month in Chicago, "have been the most stable banks on Wall Street."

Blending Merrill's New York culture with Bank of America's relatively staid style could be another hurdle to a successful merger. But Lewis has already taken steps to keep Merrill's "thundering herd" of brokers on board, saying he'll keep Merrill's name intact and appointing Merrill CEO John Thain to lead the combined wealth management and investment banking businesses.

Merrill said last month that 99 percent of its top-selling brokers agreed to sign retention packages to stay on after the sale. Besides, some analysts point out, the thundering herd would face a tough job market if they were to leave.

Bank of America has said it expects the Merrill deal to add to earnings by 2011. Thain, who became CEO last year, has already taken steps to clean up Merrill, slashing the firm's exposure to commercial real estate, raising capital, cutting jobs and selling off much of the firm's toxic investments at fire-sale prices. The firm's wealth management division was still generating solid revenues and hiring brokers in the third quarter.

John Moore, a Charlotte shareholder whose family owns 18,000 shares, wonders if keeping Thain is the best choice, since "he hasn't really been able to turn around Merrill Lynch."

However, he said, referring to Bank of America, "I think most of their acquisitions have worked out better than Wachovia's."

To see more of The Charlotte Observer, or to subscribe to the newspaper, go to http://www.charlotteobserver.com. Copyright (c) 2008, The Charlotte Observer, N.C. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.

More News:   Market Updates | Stock Alerts | All Trading News | Stock Index