Bank of America Corp. chief executive Ken Lewis today said his $50 billion purchase of brokerage and investment bank Merrill Lynch & Co. creates an "unparalleled" financial services company that can reach more retail and corporate customers, while weathering the nation's banking crisis.
In a conference call with investors, Lewis said Merrill's "crown jewel" was its force of stock brokers that can sell investments and now banking products to wealthy customers. He defended a purchase price that valued the company at about $29 a share, much more than Merrill's depressed closing price Friday of $17.05.
"It was such a strategic opportunity that we elected not to roll the dice and go ahead and do it at this time," Lewis said.
Over a weekend that saw Wall Street chieftains and U.S. officials scrambling to shore up the financial system, Bank of America reached an agreement to buy Merrill Sunday, only hours after officially dropping out of the race to buy battered investment bank Lehman Brothers.
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While bulking up Bank of America in brokerage and investment banking, the takeover could present a challenging integration and exposure to Merrill's remaining troubled assets. Both Lewis and Merrill CEO John Thain, however, said the companies had minimal exposure to Lehman, which filed for bankruptcy protection Monday after failing to find a buyer.
Bank of America said it expects to cut pre-tax expenses by $7 billion by 2012, about 10 percent of the combined company's cost base. The acquisition will contribute to Bank of America earnings in 2010.
That means another round of job cuts, yet to be announced, on top of 7,500 jobs slashed in Bank of America's July purchase of ailing mortgage lender Countrywide Financial. The bank said it also can reduce costs by getting better prices from vendors and by consolidating offices. In brokerage deals, firms typically try to hold on to revenue-producing brokers, while cutting back-office staff. Lewis said the bank would likely offer bonuses to keep brokers on board.
The sale, expected to close in the first quarter, has been approved by both boards. It needs approval of both companies' shareholders and of regulators. Three Merrill Lynch directors would join Bank of America's board.
The combined company would have the world's largest force of stock brokers, with more than 20,000 financial advisers with $2.5 trillion in client assets. Bank of America would also gain Merrill's 50 percent ownership of money manager BlackRock Inc., which has $2.5 trillion in assets under management. Bank of America has $589 billion in assets under management.
In investment banking, Merrill gives Bank of America a more global flavor and improves its standing in debt and stock underwriting as well as in merger advice. The bank said the combined firm would be No. 1 in global high-yield debt, No. 3 in global stock underwriting and No. 9 in global merger advice, according to results through the first half of this year.
Lewis has long expressed misgivings about buying an investment bank because of the risk and the potential for culture clashes. He admitted that the bank's progress in investment banking has been "frustrating" over the years, but noted Merrill Lynch gives the bank immediate size and scale, along with bringing its expertise in wealth management.
"I like it again," he said of investment banking. Just last fall, Lewis said he had had all the fun he could stand in investment banking after taking losses in the credit crunch.
Over the years, rumors have linked Bank of America with Merrill Lynch. Lewis and Thain reportedly began their talks Saturday. While the deal came together quickly, Bank of America Chief Financial Officer Joe Price said the bank was familiar with Merrill Lynch's operations as a competitor and had talked to them several times in the past about opportunities. The bank had aid from investment firm JC Flowers, which had been looking at Merrill's books recently, and the bank deployed its own team of about 45 people for the due diligence, Price said.
Merrill also comes with about $100 billion in U.S. and overseas bank deposits. Bank of America can't do bank deals because it's prohibited from obtaining 10 percent of U.S. deposits through an acquisition, but Price said it can do this one because Merrill's deposits are stowed under thrift and other charters that don't fall under the cap.
The deal is the latest bold purchase by Lewis, who has created a banking behemoth that dominates retail banking, credit cards and mortgages. With Merrill Lynch, he plants his Charlotte-based company more firmly in the international finance center of New York and can reach more customers through a retail brokerage force that can sell investments and banking products.
"I think Lewis has long lusted after Merrill Lynch," said analyst Nancy Bush of NAB Research in New Jersey. As for Merrill CEO Thain, "it was the best deal he could cut for shareholders," she said, as worries about Lehman's health turned to the next likely victim.
The takeover continues Bank of America's long history of opportunistically buying distressed companies, from banks suffering in the savings and loan crisis in the 1980s to struggling Countrywide this year, said Miami-based banking consultant Ken Thomas.
The transaction also further distances the bank from Charlotte rival Wachovia and returns the bank to the financial forefront lately claimed by New York-based J.P. Morgan Chase & Co., Thomas said. "This lets investors know they (Bank of America) are still a player and still in the game," he said.
Still, Merrill comes with a lot of baggage. The 94-year-old investment firm, with its familiar bull logo, fell into trouble last fall, when its subprime investments dragged the firm into the red.
In 2007, Merrill lost $8.6 billion and ousted its chief executive, Stan O'Neal. Ironically, one of O'Neal's missteps was soliciting a takeover offer from Wachovia without permission from his board.
In December, Goldman Sachs alum Thain took over as CEO, looking to right the ship. He has slashed exposure to commercial real estate, raised capital on the stock market, cut jobs, and sold off much of Merrill's problematic subprime mortgage investments.
But Merrill is still losing money, with a loss of $4.6 billion in the second quarter. It is scheduled to report third-quarter earnings on Oct. 16, and has already said it expects billions in write-downs related to selling off toxic investment vehicles.
Merrill, with about 60,000 employees, is perhaps best known for its wealth-management division. Its global wealth management earned $738 million in the second quarter, compared with a loss of $8.2 billion in global markets and investment banking. And while Thain has cut 4,200 jobs, mostly in investment banking and support services, he has added to his brokerage force.
Merrill had 16,690 advisers at the end of the second quarter, the most of any firm. In the tier behind it are Citigroup (14,983 financial advisers) and Wachovia (14,632). Bank of America is much smaller, with 4,500 client managers and financial advisers in its premier banking and investments division. The combined brokerage is expected to take the Merrill name.
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