Bank of America & Merrill Lynch<br />“$50 billion deal from Hell”<br />
Company Description<br /><ul><li>Merrill Lynch was one of the world's leading wealth management, capital markets and advisory companies, with offices in 40 countries and territories and total client assets of approximately $1.6 trillion.
As an investment bank, it was a leading global trader and underwriter of securities and derivatives and serves as a strategic advisor to corporations, governments, institutions and individuals worldwide.
Bank of America is one of the world's largest financial institutions.
Nation's largest retail bank, credit card company and mortgage lender
Bank of America offers industry leading support to more than 4 million small business owners through a suite of innovative, easy-to-use online products and services. </li></li></ul><li>Background<br />Sub-prime crisis 2007<br />Most of investment banks faced huge losses due to astonishing exposure to CDO<br />AIG, Freddie Mac, Fannie Mae, HBOS, Royal Bank of Scotland, Bradford & Bingley, Fortis, Hypo and Alliance & Leicester all came within a whisker of doing bankrupt and had to be rescued.<br />September 8, 2008, Lehman Brothers came under severe liquidity pressures, with its survival in question.<br />
???<br />Sep 15th Lehman Brothers filed backruptcy , after government officials could not find a merger partner for it<br />FAILED<br />As mortgage defaults continue to rise, the value of the CDOs plummeted, forcing Merrill to write down their value. The mounting losses threatened Merrill's survival. Merrill's shares dropped 36 percent for a week, reducing its market value by $15 billion, to $26 billion. <br />Investors were afraid that the contagion could spread to the other surviving investment banks<br />
Bank of America was one of the few bidders that showed up at what turned out to be a historic fire sale of the leading Investment Bank.<br />threatened with the firings of the management and board of Bank of America as well as damaging the relationship between the bank and federal regulators<br />Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders. Together, our companies are more valuable because of the synergies in our businesses.<br /> I am threatened with the firings of the management and board of Bank of America as well as damaging the relationship between the bank and federal regulators<br />CEO BoA Kenneth Lewis<br />
Details of Merger<br />Ratio of Bank of AmericaShares per Merrill Lynch Share: 0.8595<br />Merrill Lynch SharesOutstanding: 1,600,300,000<br />Data acquiredfrom 10-Q for periodended Mar, 31 2009<br />Share Price of Bank of America, September 12, 2008: $33.74<br />Offer Price for Merrill Lynch Common Stock: $29.00<br />Total Offer Price: $46,407,947,859<br />Premium over Merrill Lynch common stock marketprice ($17): 70.59%<br />Premium over Merrill Lynch Book Value ($21): 38.10%<br />
Principal transactions <br />Let’spresume an investorislooking to buy a bond.<br />If hegoes to hisinvestmentadviser and asks for a bond, the advisermayfindhim the bond fromanotherinvestorlooking to sell. He willthentransfer the bond from the seller to the buyer, taking a smallfee for himself. This iscalled an agency transaction.<br />When the investment institution actuallyis holding on to the securitythemselves, thisisknown as a principal transaction. <br />
Source of loss<br />Because Merrill Lynch held on to a large amount of marketablesecurities, alongwith an evenlarger pool of illiquidsecurities, theirlosses are the result of principal transactions alongwithotherlosses.<br />Bank of Americawasfullyaware of theseratherstaggeringlosses but stillpaid a large premium to acquire Merrill Lynch.<br />Ironically, much of Merrill’s revenue streamscontinued to berelatively consistent. This highlights the toxicrisk of a combination of principal investmentalongwithratherhighleverage.<br />
Merrill Lynch’s Financial Leverage<br />Despitereducingtheirleveragefrom 2007, Merrill Lynch stillretains a veryhighlevel of leverage.<br />If theirassetsdecline in value by only 3.6%, the entireshareholderequitywouldbewiped out.<br />Given the information wealreadyhad in 2008, thisseemslike a veryrisky transaction!<br />
Deal Completion<br />Deal completed on Monday, September 15th, 2008.<br />Deal washastilyfinished in 2 days, whichcouldbe the cause of the manyoversights.<br />Bank of Americawasthreatened to have management fired by the federalgovernment if theydid not complete the deal.<br />
All is quiet on Wall Street<br />The week following the merger Wall Street remained relatively calm.<br />Everyone presumed the worst was over, that Ken Lewis rode in on his white horse and saved the day.<br />Despite the initial panic on Monday when the S&P dropped 4.7%, the market finished the week up 0.03%.<br />
But it’s the calm before the storm<br />On September 26th, Washington Mutual, the largest saving and loan in the U.S., collapses and is forcibly sold to JP Morgan making it the largest bank failure in U.S. History.<br />The market is alarmed: The S&P closes at 1,106.42 on the 29th, an 8.8% drop from the previous day close.<br />
October 2008<br />October 2008 was one of the worst months in the history of Wall Street.<br />
Long term aftermath<br />The credit losses of Merrill Lynch were much higher than Ken Lewis envisioned.<br />By the end of September it had become clear that Merrill Lynch lost more than $51.8 billion from subprime losses, completely wiping out any prior equity they had<br />Lawsuits from misrepresenting the CDOs as a AAA-rated security poor in continuing to cost the newly established Merrill Lynch subsidiary of Bank of America<br />
Bank of America<br />The day following the Merrill Lynch transaction, Bank of America Common stock fell by 21.31%<br />BAC traded at $32.71 on market close, Sept 12<br />By Mar 6th, 2009, BAC traded at $3.12 per share<br />A loss of 90.46% of its value.<br />
Bank of America Stock<br />32.71<br />25.74<br />3.12<br />
Merrill Lynch today<br /> We have been, and expect to continue to be, required to repurchase loans and/or reimburse whole loan buyers, the government-sponsored enterprises (“GSEs”) and monoline bond insurance companies (“monolines”) for losses due to claims related to representations and warranties made in connection with sales of residential mortgage-backed securities and other loans, and have received similar claims, and may receive additional claims, from private-label securitization investors. The resolution of these claims could have a material adverse effect on our cash flows, financial condition and results of operations.<br />Excerpt from Merrill Lynch Annual Report<br />
Merrill Lynch Financials<br />Merrill Lynch is a profit generating entity, but how long will it take to pay back the huge write-offs that were plaguing their balance sheet?<br />With such volatile year to year earnings, was this investment worth it?<br />