Bank of America / Merrill: Shotgun Marriage

It's all over for Lehman (LEH). Action in the main poker room has stopped. None of the players wants to bet a penny on the Lehman pot. Indeed, Lehman Prepare For Bankruptcy as Buyers Withdraw.

This is a realization the pot is worthless. Nonetheless, expect to hear clowns screaming about "naked shorts" wrecking Lehman just as they screamed the same nonsense about Bear Stearns.

Action has now shifted to side games as AIG Struggles To Stay Alive, Begs Fed For Cash.

In another side game at least as big as the main game, Bank of America Agrees to Buy Merrill Lynch for $44 Billion.

Bank of America has struck a $44 billion deal to buy Merrill Lynch, according to two people familiar with the negotiations, a merger that will unite the nation's largest consumer bank with one of its most celebrated investment banking firms.

Both boards have approved the deal and it is now being reviewed by lawyers, the sources said. Bank of America will pay about $29 for each share of Merrill Lynch stock. A formal announcement is expected tomorrow morning.

A shotgun marriage?

I sense a shotgun wedding sponsored at gunpoint by the Fed.

Without this buyout announcement Merrill Lynch (MER) would have gotten absolutely crushed Monday. That is absolutely certain. The closing price of Merrill Lynch was $17.05 on Friday. Mother Merrill's market cap was roughly $26 billion.

Thus... Bank of America (BAC) agreed to pay $44 billion for a company that would have been worth $18 billion on Monday's open, assuming a $5 markdown on Monday to $12. Why?

No one had any cash to buy Merrill other than BAC - so what's the rush?

Various swap-o-rama tables are now in full swing with everyone trying to figure out who is holding what and who the counter parties are, and just what anything is worth, if indeed anything is worth anything at all.

Comments

[venividivici:]

You are spot on, Mish. BAC's move if it happens is designed to keep the skyscraper of playing cards from imploding. It could well be that Merrill's problems are greater than Lehman's so what does that say about BAC's long term viability.

2008 Sep 15 12:32 AM

[James Davis:]

Here's hoping that a few shorts get put out of business by this absurd deal. I doubt it though

2008 Sep 15 12:42 AM

[economywatcher:]

That is one darn good question? Dick Bove earlier this evening, when told in an interview about lehman that bofa and mer were in talks, said straight out that he didn't get it!

2008 Sep 15 12:51 AM

[drooyrich:]

CDO, CDS, OA and other derivative bombs in Merrils' asset 3 level will destroy BAC..no idea why these guys are doing this unless thay have been promised "something"...watch BAC trade significantly under on Mondays open..

2008 Sep 15 01:29 AM

[Fish Gone Bad:]

So now BAC has all the debt of Countrywide and Merrill Lynch. That really sounds somewhat-less-than-hea... Any day now, Richard Bove will report that BAC is in talks with a Korean bank!

Good ole' Lehman apologist Richard Bove. Trying to sound important and not succeeding.

Clark Jenkins
FishGoneBad.com

2008 Sep 15 01:30 AM

[Fish Gone Bad:]

That really sounds somewhat less than healthy.

2008 Sep 15 01:32 AM

[alancelt:]

Why are B of A paying $44B for Merrill, good question? Is this some sort of ploy to revalue some of the toxic paper upwards?

2008 Sep 15 01:32 AM

[bearfund:]

Three possibilities:

1. BAC is a conduit for covert Fed money, injected either for "systemic protection" or perhaps to help friends (or well-armed enemies?) get out of precarious positions.

2. BAC has balls of steel and wiles to match and will emerge from the crisis far ahead of all other players.

3. BAC is recklessly building itself up to ensure that it is deemed too big to fail even if its big bets don't pay off.

2008 Sep 15 02:06 AM

[Kerry @ Sing:]

It's simple really. BoA wants in on a seemingly bottomed out good investment. This is cash they can afford to lose playing.

2008 Sep 15 02:13 AM

[occdude:]

First off, BAC doesn't have the "cash" to buy Merrill, they plan on 100 percent stock deal which is about 1/3 of BAC market cap. This should dilute the current shareholders equity position and be a negative for the share price in the long term. But off course BAC will be able to access the Fed discount window for "short term liquidity" and exchange any toxic financial instruments in Merrills portfolio for T-bills.

This deal stinks. Wall street is on fire and the tax payer is going to pick up the dry cleaning tab for all these "wing tipped", "hand in their pocket", do nothing Hampton residents.

2008 Sep 15 02:56 AM

[ptgkc:]

I don't get it. 2 big reasons.

1 - Didn't they learn about buying distressed assets after the Countrywide fiasco. Their open bid was at $18 a share for about 25% of the company. Months later, the in for a penny, in for pound theory takes over and they have to buy the rest of the company for about $5 a share or lose the original investment to bankruptcy. Bottom line, they didn't know the exposure. NEVER buy anything if you don't understand the balance sheet and risks hidden within.

2 - I understand there is little overlap in the businesses, so BoA has largest consumer deposit in the U.S., picked up the largest U.S. mortgage company earlier this year, and this round out the bank with one of the largest investment banks. However, this one stop shop for all things has been tried and has/is failing. Does CITIGROUP come to mind??? Why would they want to round out their bank after that model?

Only thing that makes sense is the Federal Reserve forced it, after BoA wouldn't be bullied into buying Lehman. All potential buyers wanted a Fed backstop with Lehman and the Fed said no. But that doesn't mean they didn't get some other consessions from the Fed in buying Merrill. Wonder what BoA's value does this week if Merrill has to announce an update of their balance sheet and there are more losses than perviously thought.

The $29 a share buyout price is pegged to current BoA value which is almost $34 a share. BoA 52 week low was $18.44 and if this merger is a drag like Countrywide, then BoA will certainly drop this week. 10% to 20% wouldn't surprise me. $28.50 for BoA wouldn't surprise me.

2008 Sep 15 02:57 AM

[fxtrader07:]

Mish, naked shorts may have had no hand in LEH, but before you dismiss the 'naked shorts' factor that easily you ought to look into it and research it. You blunt rejection reads more like a biased opinion than a conclusion arrived at after due consideration.
you shouldn't get ahead of yourselves. you are just a human being, no genius and you can and you actually do make incoirrect assumptions and statements - like all of us do from time to time.
time to get a bit humble, perhaps, no?

2008 Sep 15 05:35 AM

[Ishortyou:]

those structured finance vehicles are black holes it will suck all financials down that hold them.

2008 Sep 15 07:07 AM

[oddsneds:]

"Bank of America (BAC) agreed to pay $44 billion for a company that would have been worth $18 billion...." well, not really, it's the marginal stock transaction that's being valued at $17, or $12 per share, or whatever. Not the company.

2008 Sep 15 11:10 AM

[Midas Mulligan:]

"...if indeed anything is worth anything at all."

Thus goes the requiem for the Great Real Estate Bubble.

2008 Sep 15 11:50 AM