BofA's Countrywide Acquisition: Dumb And Dumber

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Includes: BAC, CFC
by: Christopher Ssembonge

In the run-up to Bank of America's (NYSE:BAC) acquisition of Countrywide Financial (CFC), the media was abuzz with speculation that the U.S's largest mortgage lender would close shop. Just about when everyone was expecting Countrywide to roll over and die, in comes Bank of America's $4.1 billion all-stock offer for the beleaguered mortgage lender.

Relieved that the nation largest mortgage lender had been rescued from bankruptcy, the market jumped on this news. Now that the dust has settled, it is a good time to scrutinize the marriage between Bank of America and Countrywide.

The biggest question investors are asking is, was this the right move? My answer is a resounding NO. This merger is doomed to fail even before the ink has dried.

Why so?

  1. Like the merger of corporate titans, America Online and Time Warner, this merger can be likened to a marriage between a teenage bride and a retired banker. Countrywide's business model is reflected by it's aggressive growth model that saw it venture deep into the sub-prime mortgage mess. All while its suitor, Bank of America, pursued a relatively moderate lending strategy and exited sub-prime lending in 2001.

    The clash between two opposing and conflicting corporate cultures is bound to affect the operations of Bank of America. Never mind that they will be shutting down many of Countrywide's offices and laying off thousands of their employers. The fact that Countrywide has a larger mortgage portfolio means that many of Countrywide's executives will be left untouched.

  2. Even though the media is not highlighting it, there was no way that the U.S Treasury would have watched Countrywide fold into bankruptcy. Not in an election year and not the largest mortgage lender and servicer in the U.S. The repercussions of Countrywide rolling over would have been too much to bear for the current administration. The backlash from voters borrowers had to be contained before it spilled into electioneering campaigns.

    By and large, someone from Wall Street had to rescue Countrywide and Bank of America happened to be the one. Bank of America investors might not like it but who cares about what the 270,000 plus stock holders have to say. After all, not all of them will vote in the up coming elections. Had they all the stock holders been residents of say Iowa or Florida, a different financial institution would have been arm-twisted called-in to rescue Countrywide.

  3. Last August's $2 billion investment for a stake in Countrywide at the start of the credit crunch turned out to be a bad bet for Bank America. With Countrywide's shares trading above $20 when the announcement was made, the deal looked like a steal for Bank of America at that time. The preferred stock that is convertible to common stock at $18 a share pays a dividend of 7.25% and gives Bank of America the first chance to buy Countrywide in the event that it was sold.

    Less than 6 months later, Bank of America's 16% stake in Countrywide is underwater and they are adding more money to a loosing position. Like they say, never throw good money after bad. Especially at a time when U.S housing market woes are far from over and more home owners are expected to turn in their keys.

Should the merger fall through, Bank of America will be forced to cough a $160 million termination fee. Interestingly, the termination fee is just about the $150 million that Bank of America will earn this year from their 16% stake. That said, I don't expect this transaction to close because the housing situation is expected to worsen between now and the time this transaction is due to close.

Disclosure: none