Opinion

Felix Salmon

Revisiting the Merrill acquisition

By Felix Salmon
June 11, 2009
M&A

All eyes are on Ken Lewis today: he’ll be testifying to Congress, and, according to the Reuters news planning email this morning, “Lewis is a fiery character and we will be looking for any departure from his script.”

Yet again we’ll be revisiting the history of the last four months of 2008, and specifically two decisions made by Lewis: the September decision to buy Merrill, and the December decision, in the face of pressure from regulators, not to pull out of the deal.

There’s no doubt that the September deal was done hastily. Matt Goldstein reckons that redounds badly on Lewis:

There’s still no evidence that anyone from the federal government was holding a gun to Lewis’ head when he and John Thain shook hands on the merger just as Lehman was spinning towards bankruptcy.

Lewis bears full responsibilty for that deal–along with his newly annointed chief risk officer Greg Curl. It didn’t take a rocket scientist or a mathematician to know that Lehman’s uncontrolled bankruptcy filing would have grave consequences for the financial system. Yet that didn’t stop Lewis and Curl from agreeing to buy Merrill. And at a price that was then a substantial premium to Merrill’s then share price.

If Congressional investigators want to do more than simple grandstanding they should begin by asking Lewis what kind of due diligence his team did in September when he inked the deal. They can start by asking whether he did any due diligence or was it just wishful thinking that everything would out.

But two facts are worth bearing in mind here. Firstly, the deal was of necessity rushed: Lewis and Curl simply didn’t have the time to do due diligence on a bank the size of Merrill over the course of one frantic weekend. But if the Merrill deal hadn’t been announced, there was an extremely high chance that Merrill would have collapsed in short order — and that at that point the shock waves from the Lehman-Merrill 1-2 punch would have been so systemically damaging that Bank of America itself would probably have gone under as well. Given that Lehman’s bankruptcy was obviously going to be harmful, it made some sense for Lewis to essentially draw a line under Lehman and show the market that at least Merrill was safe. If he didn’t, the entire financial system was in jeopardy.

Secondly, essentially all deals done during the financial crisis could reasonably be considered contingent until they actually closed. I noted when Lewis announced the purchase of Countrywide that it wasn’t an acquisition so much as a call option, and after that a whole spate of announced deals ended up being unwound, including Chris Flowers’s acquisition of Sallie Mae and Citigroup’s purchase of Wachovia. Given the rushed nature of the Merrill deal, it was probably reasonable for Lewis to think that if his due diligence turned up some particularly monster black hole in Merrill’s accounts (as it did), he would be able to find a way to wiggle out of the deal somehow.

The problem was that Lewis didn’t wiggle hard enough. Faced with stern disapproval from Ben Bernanke, Lewis quietly stopped wiggling and went ahead with the acquisition, even though he knew it would be extremely bad for his own shareholders. What he should have done is simply told Bernanke in no uncertain terms that his fiduciary duty to his shareholders forced him to back out of the Merrill deal, even if doing so was going to cost him his job. It was when he buckled in December that Lewis made his biggest mistake — not when he agreed to buy Merrill in September.

Comments
4 comments so far | RSS Comments RSS

Hard to know just whom we should believe more, given all the posturing by FED, Paulson, Lewis and Thain. In retrospect, certainly an accurate statement that a subsequent failure of Merrill (probably that same week) would’ve been far more deleterious than what we eventually have experienced. My two lincolns say if Lewis had doubts then the BAC BOARD should have backed out due to the MAC or repriced accordingly given new information.

I would include a 3rd part in your linkage: LEH, AIG, and MER. During that period, the agencies (FED, FDIC, Treasury, et al) were behaving in a most unwise format for intervention. Lehman, NO; AIG, YES; Wachovia (Citi buys YES, wait NO); and then Washington Mutual. of course AIG gets it a 2nd, 3rd, etc…

Just wondering, which rock is mr Thain hiding under these days anyway ?

Posted by Griff | Report as abusive
 

“What he should have done is simply told Bernanke in no uncertain terms that his fiduciary duty to his shareholders forced him to back out of the Merrill deal, even if doing so was going to cost him his job.”

No doubt that’s true. But it’s wrong, nevertheless. You’ve advanced a Kantian view, in which there are clear principles, universal ones, in fact, and it’s simply a matter of following them. Of course, the response of the Existentialists to such a view, or system building based upon it, like Hegel’s, was laughter, amusement, scorn. Such principles are part of human conduct, but only part. Human beings aren’t smart enough to figure out such rules, and even less able to capably decide which one to apply in each particular context. That’s why, religiously speaking, Existentialists often resort to the concept of grace. Humans need God’s grace, because actions aren’t going to cut it. Too many mistakes, even in a well-intentioned life.

Lewis should have bought Lehman. I’m glad that he bought Merrill. My guess is that he believed that, having done the only thing that the Fed, Treasury, and FDIC, said could be done with large financial concerns, namely sell them to another large financial concern, he assumed that the govt was implicitly guaranteeing the solvency of the B of A. It turns out that he was correct. In the process, however, B of A shareholders and creditors have taken a bit of a hit. For that, he should be fired. But he did the right thing.

Lewis should simply stand up and say that he did the right thing, and if people don’t like it, F— Off!I’m a better man than all of you. He shouldn’t apologize, grovel, or try and excuse himself. He should admit that there are solid, if simpleminded, reasons to fire him. He should tell people to do due diligence on this. No doubt he’ll be considered insane, as I’ll be for writing this post. Nevertheless, Lewis should remind himself:

“The struggle itself towards the heights is enough to fill a man’s heart. One must imagine Sisyphus happy”

 

Instead of Lewis being in front of committee about this deal, shouldn’t Bernanke & Paulson? Lewis had no choice, if he refused, he would have been pushed out and his successor would have accepted. Its argued that this deal was bad for BoA shareholders, but wouldn’t a unchecked financial meltdown have been even worse?

Posted by Greg | Report as abusive
 

if you read the MAC he really didnt have much room to get out of the deal, so really you are overstating his strategic intelligence. The fed really were only telling him what was obvious. Furthermore if you believe that Lewis paid that price initially to prevent the failure of the banking system then surely he would have felt the same before pulling out of the deal. as its happens the guy is just an idiot.

Posted by dazedandconfused | Report as abusive
 

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