Bank Of America Stock – Merrill Lynch Deal Still Weighs
Like a lot of shotgun marriages, the Bank of America Merrill Lynch merger has faced a lot of hurdles. Bank of America CEO Kenneth Lewis has been forced to answer questions about the deal several times, including for the Attorney General of New York on April 23, 2009. He said the public had Ben Bernanke and Hank Paulson to thank for the merger.
“It wasn’t up to me,” Mr. Lewis said under oath. He further pointed out that Bernanke and Paulson had urged him to keep quiet about the deal. Lewis said that both of the financial heavyweights urged him to keep silent because not doing so could “impose a big risk to the financial system.”
Later Lewis and Bank of America came under fire due to the enormous bonuses paid out to Merrill Lynch executives and the fact that the deal resulted in another $20 billion of “bailout money” going to BAC. Lewis admitted that taking such a huge sum of money from TARP to finance the deal was a “tactical mistake.”
Of course it’s a mistake the Charlotte, North Carolina-based bank company will be living with for quite some time. It’s estimated that BAC will take at least three years to repay the $45 billion they received from TARP. Of course continuing credit losses could make that target date unrealistic.
Like it’s other major competitors, Bank of America has been suffering from massive credit losses that don’t seem to end. Not only that, the company has been forced to lower credit lines to existing accounts, and effectively “circle the wagons” as far as lending goes, in order to stay solvent. When you consider that Bank of America also swallowed Countrywide during the height of the financial crisis, you realize that this is one company that is widely exposed to huge levels of credit risks, both from consumer and business customers. During all of this, one has to question just how the Merrill Lynch deal fits into the larger corporate strategy of BAC. The deal hasn’t appeared to be a good for anyone involved.
Even Hank Paulson was called into question concerning his role in the deal. House Committee on Oversight and Government Reform Committee Chairman Edolphus Towns grilled Paulson, the former U.S. treasury secretary over his involvement.
“While all this was going on, the American people, investors and Congress were kept in the dark,” the Democrat from New York asserted.
“What the taxpayer got was an averted calamity,” said Paulson.
These are not exactly ringing words of endorsement.
Now the question remains, can the deal end up being a positive one for BAC?
Almost everyone agrees that Bank of America paid too much for Merrill Lynch, but that doesn’t necessarily mean it will end up being a bad thing in the end.
Recent estimates said that the businesses from Merrill Lynch produced $20.9 billion during the first six months of 2009. Those are relatively eye-popping numbers concerning the current financial client.
With revenues drying up in traditional credit products, BAC might end up needing the growth of Merrill’s product lines to offset losses in revenue and profit. If the growth rate is good enough, the deal could still end up being a good one.
Right now it seems the deal injured the prestige of Bank of America, Paulson, Bernanke, and Kenneth Lewis. It also cost taxpayers a lot of cash that is not yet paid off. But in the end, if things work out well, the affect on share price could be substantial and profitable.
For this reason alone, potential investors will be looking closely to the numbers to see if this ugly duckling deal eventually turns into a beautiful swan.