$50 billion worth of dice
Bank of America lost $33 billion in market value on Monday after it unveiled its $50 billion acquisition of Merrill Lynch, as investors tried to absorb the surprise announcement and weigh the implications of the most turbulent financial markets in decades.
“They paid a full price at a time when [financial] stocks are tanking. The deal also seemed to come as a last minute idea, even though they said they’ve talked before. Why now? Why amid chaos?” asked one arbitrageur who declined to be named.
News of the deal, which came after less than two days of negotiations, sparked a 21-percent selloff in Bank of America’s stock price and pushed the spread — the difference between the offered takeover price and the target company’s current trading price — to nearly 34 percent. Historically, the wider the spread, the more investors doubt a deal will close.
Investors apparently think the deal could fall apart in any number of ways, from Bank of America walking away to shareholders voting against the deal. The government could also impose conditions so onerous that the deal is no longer worth doing.
A second arbitrageur, who specializes in takeover stocks, said it was too soon to worry about Bank of America’s investors voting against the deal. The trader said the drop in Bank of America’s stock more likely reflected the 70-percent premium paid, as well as the shock of other bad news in the market — such as Lehman Brothers’ bankrupcy and AIG’s struggle to find funding. The whopping 70 percent premium compares with the average 28 percent premium paid in the first half of the year, according to Thomson Reuters.
When asked why the company pursued the Merrill deal at such a high premium, Bank of America Chairman Kenneth Lewis said: “We could have rolled the dice and possibly got it at a cheaper price…We thought the long-term benefits were so overwhelming and such a strategic opportunity that we elected not to roll the dice.”
Less than a year ago, of course, Lewis had said he had “all of the fun I can stand in investment banking.”
(Additional reporting by Megan Davies)