Bank of America attempts takeover of Merrill Lynch
Bank of America (BoA) is attempting a takeover of Merrill Lynch, which, if successful, would combine two of the largest banks in the world. BoA would buy Merrill Lynch for around $44 billion in stock. BoA, the largest bank in the United States, has been looking for a major acquisition for the last few months. The bank was seen as a possible buyer of Lehman Bothers before it pulled out, citing lack of financial support by the U.S. government, and possible shareholder problems.
Merrill’s CEO John Thain is believed to have initiated the discussion with Kenneth Lewis, BoA’s chief executive. It is believe that Merrill has been suffering major problems with a lack of cash on hand to operate its business. According to the New York Times, Thain believes that unless it can secure a deal with another bank, then it could possible face a collapse. Thain also believes that the U.S. government would not step in to stop such a collapse, as with the currently situation with Lehman Brothers.
BoA would buy Merrill at $29 a share. On Friday, Merill stock price closed at $17.05.
Merrill Lynch has suffered a massive drop in its share price over the last year, down 68 percent due to subprime mortgage crisis. Merrill had over $10 billion pumped into the bank in December 2007 and January 2008 by sovereign wealth funds.
Backgrounder: Merrill Lynch and the Subprime Mortgage Crisis
In November of 2007, Merrill Lynch announced it would write-down $8.4 billion in losses associated with the national housing crisis and remove E. Stanley O’Neal as its chief executive. O’Neal had earlier approached a rival bank for a merger, but the talks ended after O’Neal’s dismissal. In December 2007, the firm announced it would sell its commercial finance business to General Electric and sell off major shares of its stock to Temasek Holdings, a Singapore investment group, in an effort to raise capital. The deal raised over $6 billion dollars. In July of 2008, the new CEO of Merrill Lynch, John Thain, announced $4.9 billion dollar fourth quarter losses for the company from defaults and bad investments in the ongoing mortgage crisis. In one year between July 2007 and July 2008, Merrill Lynch lost $19.2 billion dollars, or $52 million daily. The company’s stock price had also declined significantly during that time. Two weeks later, the company announced the sale of select hedge funds and securities in an effort to reduce their exposure to mortgage related investments. Temasek Holdings agreed to purchase the funds and increase its investment in the company by $3.4 billion.
Andrew Cuomo, New York Attorney General, threatened to sue Merrill Lynch in August 2008, over their misrepresentation of the risk on mortgage-back securities. A week earlier, Merrill Lynch had offered to buy back $12 billion in auction-rate debt and said they were surprised by the lawsuit. Three days later, the company froze hiring and revealed that they had charged almost $30 billion in losses to their subsidiary in the United Kingdom, exempting them from taxes in that country. On 22 August 2008, CEO John Thain announced an agreement with the Massachusetts Secretary of State to buy back all auction-rate securities from customers with less than $100 million in deposit with the firm, beginning in October 2008 and expanding in January 2009. On 5 September 2008 Goldman Sachs downgraded Merrill Lynch’s stock to “conviction sell” and warned of further losses from the company. Bloomberg reported in September 2008 that Merrill Lynch had lost $51.8 billion in mortgage-backed securities as part of the subprime mortgage crisis.
On 14 September 2008, Bank of America announced it was in talks to purchase Merrill Lynch for $38.25 billion in stock. The Wall Street Journal reported later that day that Merrill Lynch was sold to Bank of America for about US$50 billion or about $29 per share. This price represented a 70.1% premium over the September 12th closing price or a 38% premium over Merrill’s book value of $21 a share, but that also meant a discount of 61% from September 2007.
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