15 Sep 2008, Nick Sawyer, Risk magazine
The acquisition follows the revelation early this morning that Lehman Brothers has filed for Chapter 11 bankruptcy protection, less than a week after announcing an estimated net loss of $3.9 billion in the third quarter of this year.
Under the terms of the acquisition, Bank of America will exchange 0.8595 shares of its common stock for each Merrill Lynch common share, equivalent to 1.8 times the stated tangible book value. Bank of America believes it will be able to achieve $7 billion in pre-tax expense savings by 2012.“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,” said Ken Lewis, chairman and chief executive of Bank of America. The deal is expected to close in the first quarter of 2009. Three directors of Merrill Lynch will join Bank of America’s board of directors, although there was no news on the scale of redundancies following the merger of the two firms. Bank of America had been linked with a potential bid for Lehman Brothers last week, along with at least two other institutions, thought to be Korea Development Bank and Barclays. However, potential bids for the ailing firm stalled over the weekend, during crisis talks with bankers and US regulators in New York. Bank of America’s decision to swoop instead for Merrill Lynch will give it access to the US investment bank’s brokerage operation, which includes 20,000 advisers and $2.5 trillion in client assets. It will also obtain an approximately 50% stake in asset management firm BlackRock. However, it will inherit a collateralised debt obligation of asset-backed securities (CDO of ABS) and subprime residential mortgage-backed securities portfolio that has cost Merrill Lynch some $25 billion in writedowns as of the second quarter of this year. In July, Merrill announced it was selling a portfolio of super-senior CDO of ABSs with a notional of $30.6 billion to private equity firm Lone Star for just $6.7 billion. The bank announced the transaction would reduce its aggregate super-senior ABS CDO long exposures from $19.9 billion as of June 27 to $8.8 billion. Separately, the Federal Reserve announced initiatives to enhance its existing liquidity facilities following the weekend crisis talks, in an attempt to stymie further bank collapses. The collateral eligible to be pledged at the primary dealer credit facility has been extended to match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, eligible collateral had been limited to investment-grade debt securities. The collateral for the term securities lending facility has also been broadened. Eligible collateral for schedule two auctions will now include all investment-grade debt securities. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged. In addition, these auctions will now take place weekly, rather than fortnightly. The amounts will also be increased to a total of $150 billion, up from $125 billion. "In close collaboration with the Treasury and the Securities and Exchange Commission, we have been in ongoing discussions with market participants, including through the weekend, to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses,” said Ben Bernanke, chairman of the Federal Reserve Board. “The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets.”