Bank of America-Merrill Lynch merger's impact

The Straits Times
Dec 5, 2008 | 6:41 AM
BofA-Merrill merger's impact

NORTH CAROLINA - WHEN shareholders vote on Bank of America's (BofA) acquisition of Merrill Lynch on Friday, they are expected to transform the bank into a business befitting its name and change the face of Wall Street.

The shotgun deal, valued at US$50 billion (S$76.4 billion) when it was announced in September, will create the largest US financial services company.

But it comes at the cost of independence for one of Wall Street's greatest institutions and is yet another sign that the era of big investment banks ruling the financial universe is over.

'The I-bank model is gone,' Keefe, Bruyette & Woods analyst Jefferson Harralson said.

'This vote is a visible piece of the changing world.'

The deal, struck as the solvency of investment banks was in grave doubt, has kept Merrill from a complete meltdown like the one suffered by Lehman Brothers Holdings Inc., which was forced to file for bankruptcy.

It also prevented the company from being sold at fire-sale prices, as Bear Stearns Cos. was last March.

The acquisition enables Bank of America to expand the financial services it offers its already huge customer base, and gives Merrill the protection and limits on risk that it needs to survive.

Shortly after the Bank of America-Merrill deal was announced, the two remaining big independent investment banks, Goldman Sachs Group and Morgan Stanley, applied to become bank holding companies by themselves - the credit crisis effectively doomed the stand-alone investment bank model.

Analysts say the deal to be voted on Friday will help reshape the banking industry.

'No management team historically has pulled off the universal banking model and has done it well,' said Professor Tony Plath, a finance professor at the University of North Carolina at Charlotte.

'This management team has the opportunity to change the industry in ways that nobody has done before.'

Under terms of the transaction Bank of America would exchange 0.8595 shares of Bank of America common stock for each Merrill Lynch common share.

Based on Bank of America's closing price of US$14.34 on Thursday, the deal was valued at just less than US$20 billion, or US$12.33 a share; the plunge in value since the deal was announced reflects the devastating losses in financial sector stocks since then.

A strong investment bank has been the only missing piece for Bank of America, which has struggled to build from within.

A series of bad bets in the investment banking unit over the past year have sunk companywide profits.

But it has seen success in its retail branches, a network expanded through deals such as the US$48 billion purchase of FleetBoston Financial in 2004.

And Bank of America has extended its reach into credit cards after buying MBNA in 2005.

In 2007, Bank of America waded into the fight between Europe's biggest banks for ABN Amro NV and emerged with Chicago-based LaSalle Bank.

And this year, the bank purchased Countrywide Financial, making it the nation's biggest mortgage lender and loan servicer.

If the Merrill transaction goes according to plan, Bank of America will be able to offer Merrill's retail brokerage services to its huge customer base.

In return, the Merrill operation will benefit from being part of a company that has a large deposit base and permanent access to financing from the government.

'This deal highlights the basic strengths of having a core deposit bank,' KBW's Mr Harralson said.

'A lot of problems in the business recently have been around liquidity and funding and that's the advantage of commercial banks.'

It also means Merrill, which will now be under closer scrutiny from government regulators, won't be able to take as many risks - but that would also help it avoid the kind of catastrophic losses that have devastated Wall Street over the past year.

Goldman and Morgan Stanley, as bank companies, will find themselves in a similar place.

'We are now realising we have to go back to a mentality of investing in productive assets and activities instead of a casino-like gambling mentality that dominated the peak in the boom market,' said CreditSights analyst David Hendler.

'Becoming part of a bank, or a bank, is less riskier.'

There is not a great deal of overlap between Bank of America and Merrill, but the companies do expect more layoffs.

Both have already cut thousands of investment banking jobs over the past year. And this week, reports circulated that tens of thousands more job reductions are possible.

Given the state of the economy and as the recession deepens, many analysts have said such layoffs are expected and more are likely to continue industrywide as the markets and Wall Street look to regain solid footing.

'There are going to be less companies, less people working for those companies, and less of this extreme risk finance going on and more of the back to basics banking,' Mr Hendler said.

'Expect less fast growth, but more sustainable growth over a longer period of time.' -- AP