What's the BofA / Merrill Synergy?

I have had more than a few people ask me via email why Bank of America (BAC) is buying Merrill (MER). After all, Merrill is badly broken, and BofA could almost certainly pick up whatever pieces are worth picking up for even less in the very near future. Arguably, it could get the pieces significantly less just by waiting for market close tomorrow. To that point, it would surprise me zero if tomorrow BofA's shares fall further and faster than Merrill's.

My guesses are two-fold:

• First, Merrill's CEO John Thain is a pragmatist. I'm guessing that, unlike, Dick Fuld at Lehman, he has been shopping his well-known firm early and at attractive prices, and he has obtained some strong interest, likely overseas or in Canada. Knowing this, BofA CEO Ken Lewis felt he had to move sooner rather than later.
• Second, BofA's Lewis has a demonstrated fondness for swinging in and buying broken financial brands at the 11th hour. He did it with Countrywide Financial, and he is almost certainly feeling the same way about Merrill. He thinks they're both bargains. The trouble is, the jury is not just out, it's on a year-long fishing trip, with respect to deciding whether he is close to correct.

Comments

[whereismybonus:]

So, is BAC next in line now?

2008 Sep 14 11:32 PM

[Philip Gvinter:]

Ken Lewis seems hell bent on becoming the next G. Kennedy Thomson his former cross town rival. CFC was a cheaper version of the Golden West deal but this MER purchase at a crazy premium to current market price should ultimately be his downfall.

2008 Sep 14 11:46 PM

[Publicliter...:]

I don't think a purchase of $29 is a ridiculous premium at all. All the analysts seem to believe that the fair value is at least 40. If BAC is right they will have a huge market share over its competators and it seems like it is going to become the new Citigroup.

2008 Sep 14 11:57 PM

[No Moss:]

Well, I'm not quite ready to give up on all this so quickly. The thing that Ken Lewis is looking at is keeping Merrill intact and reasonably happy. Lehman employees are wiped out, in terms of both morale and finances. Merrill employees are breathing a sigh of relief and gratitude. This will help immensely in merging the two cultures, which are quite different.

The synergies are there, in terms of giving BAC an affluent customer base, increasing deposits, and crossmarketing. And Merrill has enormous talent on its payroll, and a huge, valuable brokerage business.

2008 Sep 15 12:07 AM

[John C. Lee:]

yea, and look at Citigroup's problems. lol

2008 Sep 15 12:08 AM

[Jeff Cross:]

Paying $29 for Merrill is the stupidest thing I've heard of since the government destroyed the value of the agency pfd stocks and thereby cratered the regulatory capital surplus of the US small banks (which were, until this week, the most active lenders, having not immolated themselves with all kinds of fancy products they didn't understand). I suppose one act of colossal and egregious idiocy is the weekly standard now.
Of course, the $29 is no doubt based on a stock swap and if BofA opens down 50% tomorrow and stays about there (the first seems more likely than the second, but niether seems unreasonable), what Merrill shareholders get will really only be a reasonable $14.50; what the BofA shareholders get is best not discussed.

2008 Sep 15 12:39 AM

[venividivici:]

I'm with you Jeff Cross. You are so so right.

2008 Sep 15 12:46 AM

[helplessobs...:]

Jeff, it is an all stock deal and you are right on the money. With CFC and MER's toxic waste there is no room for good assets on BAC's balance sheet. Thain is an engineer and thinks carefully and logically. Lewis is a banker and is in over his head. He came to a gun fight with armed with a knife.

2008 Sep 15 01:09 AM

[JudeJin:]

this merger would go down history as the most blatantly stupid bluff to the shorts. bac risks bringing itself down along with merrill.

this bluff is going to fail. bac will be shorted without any question. merrill will open high to provide the shorts with one final chance to short above 20!!

2008 Sep 15 01:51 AM

[CrossProfit_:]

With $50B a year revenue (low end) and the potential to earn between $5 and $7B net per year, throw in cost savings and the price tag doesn't seem so high. EBIT is over $12B even in a bad year.

It is true that the bottom line has taken a hit for the last three quarters but that doesn't mean in a year from now, after the dust settles, that MER won't be back on track.

MER didn't want to risk going it alone like LEH and for that alone...kudos to MER management.

CrossProfit
Disclosure: No position.

2008 Sep 15 05:32 AM

[discov:]

Yeah, MER is a piece of trash. I smell fed.......

concisetrading.blogspo.../
Ryan

2008 Sep 15 10:39 AM

[The Realist:]

You forgot the third and fourth potential reasons for this.

3. Ken Lewis spent the entire weekend smoking crack and by Sunday night he thought a 60% premium meant only 60% of the then current price.

4. Thain has some very sordid pictures of Ken Lewis.

2008 Sep 15 10:54 AM

[Jackson Cash:]

I don't know about other posters, but the consolidation of big banks and investment houses into mega-banks in the absence of tremendous transparency scares the living $hit out of me. Now, we're creating precisely the entities that are "too big to fail". Perhaps that's the point.

I smell a rat, and eliminating competition from the financial system is bad, bad news for all.

2008 Sep 15 11:03 AM

[User 262627:]

To claim there was any time to perform due diligence inbetween declining to buy Lehman on Saturday until Sunday night is laughable. It was clearly a pressured marriage. If no deal had been done, Merrill was next in line to be taken down to zero, so to pay a 70% premium to Friday's price surely has to expose BoA directors to breach of fiduciary duty? Perhaps a paper price tag of $29 helps reduce claw-back liabilities on earlier Merrill equity injections. And BoA knew the real value of the deal would be way lower as their shares were always going to be crushed on Monday morning. If I was a BoA shareholder I would be livid, and would vote "no" to the deal with out hesitation. This takes a tenuous situation for BoA (any financial institution at the moment is on shaky ground) and makes it a colossal, binary win or fail bet. Nice one from the country's largest deposit holding institution.

2008 Sep 15 11:45 AM

[Donald Johnson:]

With BAC down to 28.59, the deal is valuing MER at about $24.+.

Meanwhile, 15k MER wealth advisers (brokers) are telling clients, "Buy BAC."

2008 Sep 15 12:26 PM

[The World's...:]

Time to watch a lot of Man vs. Wild and Survirvoman episodes. We will be foraging for food soon enough.

2008 Sep 15 01:12 PM