Financial Times | Last updated: September 15 2008 14:06
By Francesco Guerrera in London
Merrill Lynch on Monday rushed into an agreement to be acquired by Bank of America for $50bn in a sign that the crisis gripping Lehman Brothers is forcing rival investment banks to seek partners to avoid suffering the same fate.
In a dramatic U-turn on Sunday, BofA entered discussions with Merrill after pulling out of the bidding for Lehman, partly prompted by the US government’s refusal to supply financial help for a Lehman takeover.
BofA said in a statement it would exchange 0.8595 shares of its common stock for each Merrill common share in a $50bn all-stock transaction. Based on Friday’s closing prices, the offer is the equivalent of $29 per share and 1.8 times Merrill’s stated tangible book value.
BofA’s chief executive Ken Lewis has long coveted Merrill in the belief that a merger of the lender’s commercial banking operations and Merrill’s retail brokerage arm would be a formidable combination in the US financial services industry.
However, a deal could saddle BofA with more troubled assets. The bank bought the stricken mortgage-lender Countrywide and a purchase of Merrill would force it to clean up the bank’s trading books, which have already cost Merrill some $52bn in writedowns and credit losses.
The deal marks a sharp reversal in Mr Lewis’ view of investment banking. Only last October, after BofA reported a sharp drop in its quarterly earnings, Mr Lewis said he would not consider buying an investment bank. “I’ve had all the fun I can stand in the investment banking business,” he said. “To get bigger in it is not something I want to do.”
But on a conference call with analysts on Monday morning to discuss the takeover offer, he admitted he had changed his mind. “I like it again,” he said.
Analysts on the call questioned why BofA had made such a high offer – 70 per cent above Merrill’s closing price on Friday, and 29 per cent higher than its average price last week – when the investment bank’s stock was likely to fall further this week.
“We could have rolled the dice and possibly could have got it at a cheaper price,” Mr Lewis replied. “We thought the long-term benefits were so overwhelming, it was such a strategic opportunity that we elected not to roll the dice and to go ahead and do it at this time … I don’t know anybody who’s perfect at picking the absolute bottom.”
Bankers said that BofA’s move could flush out other bidders for Merrill and added that the decision by John Thain, Merrill’s chief executive, to put the firm up for sale could put pressure on other investment banks such as Morgan Stanley and Goldman Sachs to also hit the takeover trail.
Mr Thain, who was attending the Lehman crisis talks, approached some rivals asking them whether they would be interested in bidding for his firm, according to people close to the situation.
Morgan Stanley, BofA and some foreign banks were contacted but many of them declined to pursue the talks because they had insufficient time to pore over Merrill’s complex trading books, they added.
Mr Thain, the former Goldman Sachs executive and former head of the New York Stock Exchange who joined Merrill last year after the departure of Stan O’Neal, is almost certain to leave the firm if the BofA takeover goes through.
He is a fervent supporter of John McCain, the Republican presidential candidate, and some experts expect him to seek a political career.
“Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders,” Mr Lewis said. “Together, our companies are more valuable because of the synergies in our businesses.”
Mr Thain said: “Merrill is a great global franchise and I look forward to working with Ken Lewis and our senior management teams to create what will be the leading financial institution in the world with the combination of these two firms.”
BofA expected to achieve $7bn in pre-tax savings by 2012 and for the acquisition to be earnings accretive by 2010.
Additional reporting by Daniel Pimlott