Bank of America has agreed to buy Merrill Lynch in an all-share deal worth $50 billion, snagging the world's largest retail brokerage after one of Wall Street's worst weekends.
The deal came after tense negotiations over the fate of Lehman Brothers Holdings, which triggered concern that market participants would lose faith in other investment banks. Lehman said early this morning that it would file for Chapter 11 bankruptcy protection.
Analysts said the deal catapults Bank of America into positions of strength in three businesses where it was weak. They said that now Bank of America has one of the best and largest retail brokerages in the country, one of the top investment banks in the world, and a large stake in one of the best investment managers in the world.
Bank of America agreed to pay 0.8595 shares of Bank of America common stock for each Merrill Lynch share. The bank is also buying about $44 billion of Merrill's common shares, as well as $6 billion of options, convertibles, and restricted stock units.
Bank of America said it expects to achieve $7 billion in savings by 2012, and expects the deal to add to its earnings by 2010. The transaction is expected to close in the first quarter of next year.
The price, which comes to about $29 per share, represents a 70% premium to Merrill's share price on Friday, although Merrill's shares were trading at $50 in May and over $90 at the beginning of January 2007. The deal has been approved by directors of both companies. Three Merrill directors will join the Bank of America board.
Stuck with some of the same toxic debt - much of it mortgage-related - that torpedoed Lehman's balance sheet, Merrill has been hit hard by the credit crisis and has written down more than $40 billion over the last year.
Last month, the bank arranged to sell over $30 billion in repackaged debt securities to Dallas-based private equity firm Lone Star Funds for 22 cents on the dollar. In spite of its exposures to complex debt securities, the bank had seen by some as undervalued, in part because of its massive brokerage business, which analysts have said is worth more than $25 billion.
The brokerage is the largest in the world by assets under management and number of brokers. Merrill also has a stake of about 45% in the profitable asset manager BlackRock, worth more than $10 billion.
Still, there are risks for Bank of Amercia, which had little time to complete due diligence of Merrill's books, a particular concern given the complexity of the company's exposure to mortgage-related securities and other complex debt.
But this is not the first time Bank of America has done a quick acquisition. In 2005, the bank bought credit card company MBNA after less than a week of due diligence, with Lewis saying the company was comfortable with the acquisition because it knew the people and business well.
