September 15, 2008

Bank of America to Buy Merrill -

Bank of America to Buy Merrill -

What a weekend it was, history is being made here. I wanted to be a fly on the walls in the federal reserve and listen in at the negotiations. I can't wait for a book similar to "when Genius failed" that talked about a similar episode of American finance when LTCM failed.

I am a little relieved that BofA backed out of buying Lehman but now it is buying Merrill, a far better acquisition with much better assets. Here are some thoughts:
  • Merrill has much better assets than Lehman and the fit is much better. Merrill has good assets, a large network of brokers, good investment bank, stake in BlackRock and other assets. It has been cleaning up its balance sheet since John Thain took over last year, so I think, I hope, that there is far less risk with Merill than Lehman, which did nothing since the credit crises broke. But then again investment banks balance sheets are very obscure and I do not know what is on Merrill books.
  • Dividend cut: there is a higher probability now that BofA will cut its divided to boost its capital base.
  • The independent investment banks model will fail. Only Goldman and Morgan Stanley are left standing and you got to think how are they going to finance their operations. Leverage in the hands of bankers are like ticking bomb, the story throughout history has been repeated so many times. JP Morgan can take Morgan Stanley and reunite the firm that once was broken up by US regulators.
  • I view my investment in BofA as speculative now. The bank will either make incredible returns or will languish around dealing with losses and law suits.
  • Executing a string of mergers is hard and I am concerned about that.
  • BofA is building an empire of American finance that sprawls into all corners of the US banking system. Just look what happened to Citi is my initial thought. However there is a big difference between the two: BofA is buying at extremely low valuation and its competitors are disappearing at fast pace. Those two factors increases the likely hood of making a decent return. But manging the empire is what concerns me; it will be a daunting task.
  • It is an all stock deal that means I as a shareholder will be diluted.
On another note regarding Lehman's commercial assets, I need to make this clear as it gets lost in media headlines. Lehman's assets are not toxic as being reported in the media, it is the leverage that killed any possible value in these assets. Lehman in 2007 and 2006, height of leverage bubble, bought at incredibly rich valuation commercial properties and debt at insane leverage ratios. Now leverage is hard to come by to refinance these assets and service their debt so they have to sell at lower valuations. That is why Lehman is in trouble not because of the performance of the commercial real estate.

Again I can't wait for the book!!


Anonymous said...


Do you think BAC overpaid for MER? I understand that such properties are hardly available but there didn't seem to any other buyers. I agree this could be an excellent deal due to lack of overlap between the businesses but price might be too high.


Sami said...

They could have waited and picked it up less costly but I think there is a cost for that in the destabilization of Merrill and clients jumping ship. then it becomes harder to convince to come back, therefore eroding the value of the acquisition.

bofA held talks with Merrill long ago at much higher price so the value of the Merrill franchise to BofA still makes since, ignore the trading price because it does not mean much when you acquire a business.

I like Lewis and his team they are good so I hope they can mange to digest merrill and Country at the same time and manage the business well.