So why did John Thain do it? Well, he didn’t have much of a choice.
“In order to prevent a confidence run on Merrill Lynch in these very tough markets,” says Brad Hintz, of Sanford Bersntein, in a research note this morning, “Mr. Thain agreed to have Merrill Lynch be acquired by Bank of America. Given the lack of feasible acquirers and the uncertainty of future write-downs from Merrill’s troubled assets, we view the acquisition price as favorable.”
Bank of America Sunday night agreed to pay around $50 billion in an all-stock. Based on Friday’s close, that implies a $29-per-share bid for Merrill—about 1.7 times its tangible book value. This amounts to a 70-percent premium on Merrill’s closing share price Friday.
“The deal will give Bank of America the largest domestic retailbusiness, with total client assets of $1.6 trillion and 16,690 financial advisors,” says Hintz. “It also gives BofA about a 50-percent stake in BlackRock, “a top-five investment banking franchise and [will] add to its sales and trading business,” Hintz says. Hintz puts the “sum of the parts” value of Merrill at about $35 per share; Merrill’s retail brokerage unit is worth $26.7 billion, Hintz argues.
Federal Reserve officials were reportedly encouraging such a deal over the weekend, as it was feared that the prospect of a Lehman Brothers bankruptcy could lead to a crisis of confidence in Merrill Lynch next, potentially pushing the 94-year-old firm to failure.
The premium paid by BoA for Merrill Lynch indicates it may have been in much healthier shape than Lehman Brothers, wrote Landeburg Thalmann analyst Dick Bove in a research report this morning. The deal, he says, should be a big positive for both parties.
“The deal does make sense on a business combination basis. Merrill can bring equity underwriting, investment management, a strong retail sales force and international penetration to Bank of America,” says Bove. “In turn, Bank of America has 68,000 commercial customers and millions of account holders who could benefit from Merrill’s investment services. Plus, Bank of America’s capital allows it to hold on to questionable Merrill assets without selling them immediately into the market.”
One financial advisor, writing on Registered Rep.'s forums, said that the Merrill advisors with whom he had spoken are now looking to leave Merrill. "They don't have much faith in what the rententions will look like. They also feel lied to by Thain...big time, and are worried they will lose some clients," the advisor writes.
As of Friday, Bank of America was thought to be a potential buyer of Lehman Brothers, but the bank reportedly ducked out after it was made clear that there would be no government support for a Lehman takeover.
But in a conference call this morning with Merrill CEO John Thain and Bank of America CEO Ken Lewis, Lewis said that he did not approach any other banks about potential deals. "This is the strategic deal of a lifetime. We’ve known that for a long time. We never had been able to find the right time and the right moment. This was the one." Lewis also said that layoffs resulting from the acquisition of Merrill Lynch would come from the combined company, not just from Merrill's ranks.
Lewis also said that one of the investment banks advising on the deal, JC Flowers & Co., had already done extensive due diligence on Merrill before Bank of America started talking to them about the deal.