Bank of America - Merrill Lynch Merger

[peaceloveunderstanding]

Headline on Reuters "Bank of America to buy Merrill Lynch for $29/share: CNBC, citing WSJ "

That was rather unexpected.

What else will they acquire before this is through?

[tozmervo]

Indeed, the WSJ article is here: http://online.wsj.com/article/SB1221422785...pecial_coverage

"Why would Bank of America do this?" said analyst Nancy Bush at NAB Research LLC in Annandale, N.J. "Ken Lewis always likes to buy the biggest thing he can. So why not this? You are master of the universe, basically."

Today's financial implosion wasn't so much the other shoe dropping as the whole closet catching on fire. Say what you will about BofA, it seems they will emerge much better off than many - if not most - of its peers.

Oh, also something significant from that article: "I think John Thain at Merrill is the ultimate realist," Ms. Bush said, the analyst, who expected federal regulators to bless the deal by relaxing deposit limits for bank-holding companies.

I don't recall the exact numbers, but isn't there a regulation that prohibits any bank from holding a certain percentage of American deposits? If BofA is being allowed to pass those limits, does that mean it will, essentially, "max out" its growth potential in that segment?

[SmellyCat]

Headline on Reuters "Bank of America to buy Merrill Lynch for $29/share: CNBC, citing WSJ "

That was rather unexpected.

What else will they acquire before this is through?

So much for Ken Lewis' statement that "he's had all the fun he can stand in investment banking"...lol.

I wonder what this will mean for Charlotte. BofA has already moved most of their investment bankers to NYC.

[dubone]

It pretty much solidifies that Bank of America is not struggling as much as the other banks. If this comes to fruition, Merrill will be an unbelievable jewel in BofA's crown. It does beg the question, though, how committed the new financial giant will be to remaining in Charlotte.

However, it bodes very well that they have been so committed to date, but also that it is considerably cheaper to house back office and headquarters operations outside of NYC. However, it seems that their presence in NYC will exponentially grow.

[peaceloveunderstanding]

Committed to Charlotte?

From what I understand, Bank of America is not a 'New York bank'.

[Route]

Everytime BoA buys somebody, one of you starts the same thread. Meanwhile BoA just keeps getting bigger, adding more employees in Charlotte and building more towers. What is it going to take for ya'll to get it? Other than Goldman, BoA may be the strongest bank in the land and they have no intentions of moving their headquarters to NYC.

[HopHead]

I think this even more solidfies that they are here to stay in Charlotte. They are buying an Investment bank, not another consumer bank... They've already had their IB business up in NYC, so that won't change. If they were buying another consumer bank of comparable size in NYC, then we may have something to talk about.

[monsoon]

..... BoA just keeps getting bigger, adding more employees in Charlotte and building more towers. ....... and they have no intentions of moving their headquarters to NYC.

Huh? What major tower has BofA built in Charlotte for itself in more than a decade? BofA's just finished building a futuristic modern skyscraper but it was in NYC instead of CLT. They have pretty much abandoned Gateway so I am not sure your characterization is correct. In regards to adding more employees in Charlotte, I think officially between 2004 and the end of 2007 they added a grand total of 314 jobs. However their recent notable acquisition, Countrywide has caused them to announce 1000s of layoffs and many here in Charlotte. What is different about the Merrill Lynch, a firm that is about to go under, from causing more of the same?

.......

However, it bodes very well that they have been so committed to date, but also that it is considerably cheaper to house back office and headquarters operations outside of NYC. ..

Merrill Lynch has been very aggressive with moving work to India and Brazil along with moving the stuff that does stay here to domestic outsource firms. It would be my guess that BofA, if this thing goes through, will move towards the ML direction with their current operations rather than bring ML stuff back in house.

[clt29301]

It's way too early to tell what the impact to Charlotte will be with this buy out but, it certainly is more efficient to run functions out of Charlotte rather than NYC. Some functions may move offshore but, there are some functions that may move back onshore.

To answer a question posed earlier, none of the BA towers were built as single tenant buildings, however, there have been some built within the last decade. The Hearst Tower was finished in 2002 and houses a large number of BA employees including a large trading floor. The IJL Center also includes a large number of BA employees and was finished in 1997. 1 BA Center is currently under construction with the Ritz and will house a large number of BA employees. The tower in NYC was recently completed and is also a multi tenant building.

[uptownliving]

Huh? What major tower has BofA built in Charlotte for itself in more than a decade?

LOL, you are kidding right? Do I really have to list them out for you?

But to the topic at hand I do not expect much to change in Charlotte as a result of this merger.

[monsoon]

....

To answer a question posed earlier, none of the BA towers were built as single tenant buildings, however, there have been some built within the last decade. The Hearst Tower was finished in 2002 and houses a large number of BA employees including a large trading floor. The IJL Center also includes a large number of BA employees and was finished in 1997. 1 BA Center is currently under construction with the Ritz and will house a large number of BA employees. The tower in NYC was recently completed and is also a multi tenant building.

They like everyone else are investing in real estate but they are not building these places because of large numbers of employees being added here which was the point being made. I think it was announced in 2006 they would have 1200 employees at 1 BA but that was before they announced 10,000 or so layoffs. As I mentioned above, they also built that huge office complex at Gateway plaza which, from what I understand, is mostly empty of their employees now.

----------------------

This announcement seems have happened because BofA did not manage to pull off a deal to take Lehman brothers, basically because there won't be any taxpayer guarantees to bail out that financial institution. The govt. is having indigestion over bailing out Freddy Mac and Fanny Mae, to the amount equal to $1000 for every person in the USA if this cost was divided evenly against the entire US population. Of course that cost will be much higher because the bailout money is being added to the national debt. More significantly the govt. is signaling no more taxpayer corporate welfare to the banks who will now have to figure out how to clean up the mess they created instead of dumping the problem on the public and moving on.

It remains to be seen what happens with this announcement. ML has 60,000 employees that BofA is going to initially absorb. Of course this number is not going to remain and it will be interesting to see where the cuts come.

[clt29301]

They are investing in real estate but they are not building these places because of large numbers of employees being added here which was the point being made. I think it was announced in 2006 they would have 1200 employees at 1 BA but that was before they announced 10,000 or so layoffs. As I mentioned above, they also built that huge office complex at Gateway plaza which, from what I understand, is mostly empty of their employees now.

It is irrelevant who is building the office towers, Wachovia does not own 1Wac, 2Wac or 3Wac and at some point will most likely sell the new Corporate Center. The Durst Organization is developing the new BA tower in NYC, it is not solely for BA employees. As for employee counts, they will always change, both banks move employees in and out of Charlotte. But, BA is not building these towers (or agreeing to lease large chunks of space) with the intent of having fewer workers in Charlotte, that simply makes no sense. From what I have seen by BA and other companies, they will not invest or commit to new spaces unless there is a specific need. I have never heard that there are no BA employees at Gateway, in fact, I know BA employees who are still there.

One thing that is more important is that all commercial & investment banks, whether in NYC or Charlotte, need to be more cost efficient. In a note to clients, an analyst recently noted that investment bank revenues are down 63% while non personnel expenses (building & technology) are up 25% over the prior year. Mergers usually work best when cost savings are achieved and one of the easiest ways to get immediate cost savings in this case would be to move HQ functions (accounting, HR, some IT, legal etc...) to Charlotte. A lot of the work could be absorbed into existing areas (with possible FTE increases) but as I said before, it is way too early to see how this will play out. It is fun to speculate what will happen but, the only thing that we know for sure is that is much cheaper to run a lot of business operations out of Charlotte rather than keeping them in NYC.

[Bynocerus]

Indeed, the WSJ article is here: http://online.wsj.com/article/SB1221422785...pecial_coverage

I don't recall the exact numbers, but isn't there a regulation that prohibits any bank from holding a certain percentage of American deposits? If BofA is being allowed to pass those limits, does that mean it will, essentially, "max out" its growth potential in that segment?

By deposits, ML is one of the largest banks in the country, so it's pretty safe to assume the cap has been relaxed *substantially.*

The fact that this is being allowed tells you how bad it is out there; this move paves the way for other super-regional and perhaps even major banks (paging N Tryon) to be absorbed by the solvent players. The 10% cap is great, unless it threatens stability of the entire system.

C, BAC, WFC, JPM: which one will you be banking with in five years?

[monsoon]

^If the 10% cap is removed, then would that not also be an obstacle removed which was given as a reason that Wachovia could not be taken over?

[Bynocerus]

^If the 10% cap is removed, then would that not also be an obstacle removed which was given as a reason that Wachovia could not be taken over?

Yes.

But.

WB still has more assets than any domestic potential suitors save BAC, C or JPM. Nothing says WB doesn't merge, subsume its name to its aquirer, but continue to be based out of Charlotte.

I guess the thing to keep in mind is that BAC didn't move its HQ to Charlotte because it didn't like San Fran; NC is a great place to bank, so I'm not terribly worried about losing the banking side. What DOES worry me is that there is now tremendous disincentive for attracting any other investment functions to the Charlotte area due to consolidation, economies of scale, existing infrastructure, etc.

[SmellyCat]

^If the 10% cap is removed, then would that not also be an obstacle removed which was given as a reason that Wachovia could not be taken over?

This will be addressed by the Fed. My reaction is that this will be a one-off event that had to be done by the Fed from keeping the markets from going into a state of utter freefall. I don't believe the same "relaxing" would be granted for a takeover of, say, a Wachovia. So if your implication is that the BofA purchase of Merrill will pave the way for a large bank purchasing Wachovia and getting around the 10% cap, it likely won't.

Just an FYI, the 10% cap would not apply to a takeover of WaMu as they technically are a thrift.

[monsoon]

.....

I guess the thing to keep in mind is that BAC didn't move its HQ to Charlotte because it didn't like San Fran; NC is a great place to bank, so I'm not terribly worried about losing the banking side. .....

No doubt, but San Francisco is not NYC. It doesn't go without notice that all of these deals are taking place in NYC and Ken Lewis is there right now giving a press conference. That conference is not taking place in Charlotte. It's hard to imagine they would abandon that city as they did with SFC.

Speaking of the press conference, Mr. Lewis has admitted this was apparently a 36 hour deal so there has been no due diligence done. He said that basically they moved fast to keep another bank from doing the same thing. I guess it remains to be seen if his "hunch" is different this time as compared to the decision he made with Countrywide.

[Commoner]

This will be addressed by the Fed. My reaction is that this will be a one-off event that had to be done by the Fed from keeping the markets from going into a state of utter freefall. I don't believe the same "relaxing" would be granted for a takeover of, say, a Wachovia. So if your implication is that the BofA purchase of Merrill will pave the way for a large bank purchasing Wachovia and getting around the 10% cap, it likely won't.

Just an FYI, the 10% cap would not apply to a takeover of WaMu as they technically are a thrift.

ML has a ton of assets, but they're AUM - not bank deposits. I don't believe this impacts the cap in any meaningful way.

Also - w/r/t the Fannie/Freddie bail out - ZERO of that debt is on the federal government's balance sheet. Before we start allocating per capita taxpayer burdens, let's see if that actually takes place.

No doubt, but San Francisco is not NYC. It doesn't go without notice that all of these deals are taking place in NYC and Ken Lewis is there right now giving a press conference. That conference is not taking place in Charlotte. It's hard to imagine they would abandon that city as they did with SFC.

Speaking of the press conference, Mr. Lewis has admitted this was apparently a 36 hour deal so there has been no due diligence done. He said that basically they moved fast to keep another bank from doing the same thing. I guess it remains to be seen if his "hunch" is different this time as compared to the decision he made with Countrywide.

Did you dial-in? Lewis said substantial diligence had been done on ML. They relied on third party diligence that had been performed in the last few days (I assume for other prospective investors in Merrill, including this third party diligence performer). To say there has been no due diligence is pretty sensational.

[Commoner]

One thing that is more important is that all commercial & investment banks, whether in NYC or Charlotte, need to be more cost efficient. In a note to clients, an analyst recently noted that investment bank revenues are down 63% while non personnel expenses (building & technology) are up 25% over the prior year. Mergers usually work best when cost savings are achieved and one of the easiest ways to get immediate cost savings in this case would be to move HQ functions (accounting, HR, some IT, legal etc...) to Charlotte. A lot of the work could be absorbed into existing areas (with possible FTE increases) but as I said before, it is way too early to see how this will play out. It is fun to speculate what will happen but, the only thing that we know for sure is that is much cheaper to run a lot of business operations out of Charlotte rather than keeping them in NYC.

I'll just throw another piece of "generally accepted" information among the 4 blocks around North Tryon regarding the low-cost center of IB in Charlotte v. the center of the IB universe (ignoring London), NYC. It's that projects like the Hearst trading floor, etc. have been a flop. Lower cost center be damned, the banks have had little success in attracting true investment banking ops to Charlotte for the simple reason it's not NYC. Recognizing the futility only sends more and more traditional IB functions back to NYC, where, between ML and BAC, there's massive commercial real estate capacity right now.

[SmellyCat]

Lewis just said during the press conference that the combined companies' headquarters would be in Charlotte.

[monsoon]

,,,,,

Did you dial-in? Lewis said substantial diligence had been done on ML. ...

No, I don't work for the Bank. I am watching it live on TV. I backed up my DVR and listened again. The question came in from the Financial Times, ..."how long was this deal in the making?" Answer "basically began working on it Saturday morning". Lewis added "its better to sieze on this opportunity as we see it at the moment... or ....than not catching it at all". That really sounds like rolling the dice to me and they didn't do any due diligence. 36 hours is not a long time. Remember up until this weekend, BofA was attempting to take Lehman.

[atlrvr]

I recommend reading the Wall Street Journal coverage beyond relying on canned answers. They have so much more detail on the intracies of these deals.

I will say that due diligence was preformed in the macro sense. Was every asset audited, of course not. Basic assumptions were made, and a risk-adjusted value was offered. This isn't like high-risk IB transactions that are trying to eek value on razor thin margins....this is about finding value through reducing operating costs, and broadening the market. They don't expect to find profitability to this transaction until 2010. It's not a day trade, based on a rumor.

[Commoner]

I recommend reading the Wall Street Journal coverage beyond relying on canned answers. They have so much more detail on the intracies of these deals.

I will say that due diligence was preformed in the macro sense. Was every asset audited, of course not. Basic assumptions were made, and a risk-adjusted value was offered. This isn't like high-risk IB transactions that are trying to eek value on razor thin margins....this is about finding value through reducing operating costs, and broadening the market. They don't expect to find profitability to this transaction until 2010. It's not a day trade, based on a rumor.

Good advice. Also - the dial-in isn't limited to employees. We (non-analysts) can't comment or ask questions (don't worry - the analysts questions are predictable and all restatements of prior questions, anyway).

[SmellyCat]

Interesting...for what it's worth the WSJ did a list of winner and losers from this weekend's events. Winners included BofA, citing that they are getting a massive retail brokerage force and one of the best I-banks on the Street.

[Commoner]

No, I don't work for the Bank. I am watching it live on TV. I backed up my DVR and listened again. The question came in from the Financial Times, ..."how long was this deal in the making?" Answer "basically began working on it Saturday morning". Lewis added "its better to sieze on this opportunity as we see it at the moment... or ....than not catching it at all". That really sounds like rolling the dice to me and they didn't do any due diligence. 36 hours is not a long time. Remember up until this weekend, BofA was attempting to take Lehman.

Also - remember that substantial diligence (for a deal of this type) was performed by JC Flowers.

To paraphrase ... "how much diligence did you do?" ... Ken: "JC Flowers helped ... BAC had "extensive knowledge of ML as a competitor ... we were very careful and deployed the traditional IB diligence team ... 45+ on site ... team made incredible progress in short amount of time."

This, as much as CFC was, is a bet-the-company event and it looks like they were certainly diligent ... from a "diligence" perspective.