Bank of America (NYSE:BAC) purchased Countrywide Financial (CFC) for $4 billion in an all-stock deal to rescue the struggling mortgage lender. According to the deal, Countrywide shares are valued at $7.16 a piece, which is a huge discount from CFC’s 52 week high of $45.26.
Current CFC shareholders will receive .1822 shares of Bank of America (BAC) stock in exchange for each share of Countrywide. This deal gives Countrywide shareholders a favorable piece of the America’s leading financial institution.
Buying the Nation’s Largest Home Lender For Pennies on the Dollars
Even though Bank of America will experience losses with Countrywide’s loan portfolio in the short term, BofA gains direct exposure and leading market share to a normally profitable home mortgage industry.
If you compare the all-stock purchase price to CFC’s 52 week high, Bank of America purchased Countrywide at an 85% discount to its speculative market value. BofA has enough cash ($385 billion on its balance sheet) to survive any further shakeups in the mortgage market, giving them a longstanding, profitable mortgage loan business at an incredible discount.
Long Term Benefits of the Mortgage Real Estate Market
The subprime mortgage crisis created a domino effect in the real estate market because high cost ARMs made homeownership impossible over the long term. Because many homeowners shopped for homes they could not afford, it created a demand for these unsafe home loans that only spelled disaster once investors stopped backing the loans.
If mortgage lenders return to ethical business practices and provide reasonable loans to borrowers, then mortgage lenders will return to profitability.
Looking Forward: BAC 6.6% Dividend + Plenty of Emergency Cash
In the long term, Bank of America is a fairly safe and liquid investment. BAC stock pays a 6.6% dividend (better than most short term CDs) and remains a highly profitable bank with incredible amounts of cash and leverage over the general banking marketplace.
Investors who remain patience over the next 5 to 10 years will be rewarded for Bank of America’s foresight into the correction of the financial markets.