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 Bernstein, 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 deal. Based on Friday’s closing price, 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. Bank of America’s shares were clobbered in trading Monday, closing down 21.31% to $26.55, while Merrill Lynch shares inched up 0.06% to close at $17.06.
“The deal will give Bank of America the largest domestic retail brokerage business, 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.
Merrill’s Best Asset
The biggest question now is what Bank of America will do to hold onto Merrill Lynch’s dearest asset—its approximately 17,000 financial advisors. Merrill Lynch’s independence and the strength of its brand have long been sources of pride for its financial advisors, and both of those things are now at stake. Already, some Merrill advisors say they have been bombarded with calls from headhunters. Merrill’s rivals on Wall Street are surely interested in recruiting some of its talent, and independence is always an option, so BofA will probably need to provide some kind of financial incentive for them to stay, says Danny Sarch, a recruiter with Leitner Sarch Consulting in White Plains. Considering the value of recent retention packages for advisors—which may be irrelevant since the landscape has changed dramatically—one might calculate that BofA could offer 100 percent of the average Merrill FA’s average trailing 12-month production, he says. “The average Merrill FA does roughly $800,000 in production annually. That’s $13.6 billion in retention money,” he says. “That’s a lot of money.”
On the other hand, Merrill’s biggest competitors—Wachovia, UBS, Morgan Stanley, Citigroup and Goldman Sachs—are far from immune to the latest troubles in the market. Morgan Stanley and Goldman Sachs are the last of the large independently owned Wall Street broker/dealers and NYU economics professor Nouriel Roubini, a well-known doomsayer, said in his blog Global EconoMonitor over the weekend that Morgan Stanley and Goldman Sachs could well be next in line. And it was only a few months ago, in April, that Lehman Brothers CEO Richard Fuld was saying the worst of the crisis was over. And under Thain, who came on as CEO last November, Merrill may have done more than many U.S. financial services firms to protect itself from the mortgage crisis, including raising a lot of capital and selling off bad assets. In this kind of environment, Merrill advisors--and their clients--may want to stay put and enjoy the safety offered by their new position.
So far, advisor reactions to the deal are mixed. One Merrill broker in New Jersey is thrilled with the news of the deal. “It’s the best possible thing that could have happened because the combined entities are better than the individual entities,” she says. “From a credit quality standpoint it will only give us more and cheaper access to capital; it gives the global m&a, fixed income and equity divisions access to less expensive capital, and it gives a sense of security to our 17,000 financial advisors and their clients. It was a really easy thing for me to come into work this morning.”
Another broker was similarly pleased with the deal due to Bank of America’s capital position. “We’re now on a bigger cruise ship,” he says. Still, he’s been getting a lot of calls from clients. “The phones have been going crazy. We’re having some tough conversations with clients and there will be fallout with clients.”
But a former Merrill manager says he’s heard from many Merrill advisors that they are waiting to hear what kind of retention package they will get from Bank of America, and even preparing story lines for clients to explain their departures in case they do decide to jump ship. And an advisor from a rival firm, writing on Registered Rep.’s forums, says that the Merrill advisors with whom he has spoken are unhappy with the deal. “They don't have much faith in what the retentions will look like. They also feel lied to by Thain...big time, and are worried they will lose some clients,” the advisor writes.
Saving Itself
Federal Reserve officials were reportedly encouraging a Merrill sale 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.
Still, the premium paid by BofA 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.”
In a conference call this morning with Merrill CEO John Thain and Bank of America CEO Ken Lewis, Thain said what role he will play still has not been determined. But one Merrill broker in Dallas says she has heard that Bob McCann, Merrill’s current vice chairman and president of global wealth management, and Dan Sontag, head of Merrill’s Americas Advisory group, will be running the combined retail brokerage. As long as they are holding the reins, she said, she will stay with the new firm. Bank of America has approximately 2,000 retail brokers in its own retail brokerage operation, called Banc of America Investment Services. But these advisors are much lower-end producers, in the $250,000 to $400,000 range.
In a conference call this morning with Merrill CEO John Thain and Bank of America CEO Ken Lewis, Lewis said that any layoffs resulting from the acquisition of Merrill Lynch would come from the combined company, not just from Merrill's ranks.
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.
Still, on the conference call 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 said.
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.
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