Bank of America is Overpaying for Merrill Lynch

Bank of America is Overpaying for Merrill Lynch

I just cannot figure out what they are smoking at Bank of America to pay $44 billion for Merrill.

It just doesn't make sense. 

On a night when they could have picked up Lehman Bros. for $1, but obviously chose not to because they couldn't get their hands around the liabilities and couldn't get the US government to provide Bear-like liability limitation, Bank of America chose to purchase Merrill for $44 billion of $29 a share.   Why?

The first thing that you do is hand it to John Thain, Merrill's CEO.  He obviously cleaned up Merrill's balance sheet to the point where it could be easily understood and the liabilities would be able to be tolerated.  But, then who knows?   Bank of America acquired Countrywide in spite of the fact that that it brought extraordinary liabilities which they did not understand.

Whether Bank of America understood the liabilities, they certainly could have picked up Merrill for a lot less than $29.  With the stock going out at $17 on Friday and Lehman's failure imminent, a $22 price would have looked very good to Merrill's shareholders this morning.  Moreover, if Ken Lewis could have waited until the market opened on Monday, Merrill would have lost half of its value and could have been bought for a song.  With Lehman gone, attention certainly would have turned to Merrill's viability.  The stock, which went out of Friday at $17, certainly would have lost half of its value would have opened at $8 and have been purchased for about $14.

The acquisition itself makes sense for so many reasons, but Bank of America shareholders need to be rubbing their chins and wondering why Bank of America overpaid by at least a factor of 2, or in this case at least $22 billion.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to financial literacy and bank transparency. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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Comments

  • Sam Cass

    September 15, 2008

    I disagree. Obviously Ken Lewis got a look at Merrill's books and realized the company was in okay shape. He wanted to move now while the markets were discounting all brokers rather than wait for things to stabilize. For a price 70% lower than what he would have paid at the beginning of year he turned Bank of America into the world's largest brokerage. Just like he turned BofA into the world's largest mortgage broker.

    There may be still be some toxic stuff on Merrill's books but the folks of BofA have accounted for it I'm sure.

  • Rob

    September 16, 2008

    JC Flowers advised them. You can be sure that they knew what they were doing.

  • 2VGrW

    September 16, 2008

    Don't be too upset about missing this one. BoA used a worthless currency - their own stock - so that honeymoon was brief. Merrill went out at the same price it was at before the announcement.

  • Sam Cass

    September 16, 2008

    Roubini, who was pretty accurate in predicting this whole calamity thinks that BofA made a foolish move.

    http://finance.yahoo.com/tech-ticker/article/58320/Roubini-BofA%27s-Lewis-%27Totally-Overpaid%27-in-%27Reckless%27-Deal-for-Merrill?tickers=BAC,MER,LEH,GS,C,WB,WM

    He thinks it now puts BofA at risk and that the other broker deals are going to have to pair up or face Lehman's fate.

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