$50 billion worth of dice

September 15, 2008


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)

7 comments so far | RSS Comments RSS

Surviving Black Monday: 9/15/08 & the months of financial crisis sure to follow – How will investors, homeowners and productive Americans in the private sector survive the tidal wave of collapsing investment markets, vanishing financial institutions like Merrill Lynch, Lehman, AIG, Freddie Mac, Fannie Mae, Washington Mutual? This nightmare on Wall Street combined with the real estate, mortgage and credit crisis threatens our homes, jobs and small businesses, investments and retirement plans.

On top of this, we have politicians of both parties claiming to have solutions when they don’t even know enough about the credit crisis, the dollar, the Federal Reserve, markets and complicated financial instruments to even talk intelligently about the problem or solutions.

Finally this is an election year and the only guarantee is Herbert Hoover Bush will be succeeded by presidential and congressional candidates of both parties who know nothing about business or Wall Street who have spent their careers feeding at the trough of tax revenues taken from working Americans.

Today, what should freedom loving, productive Americans do to defend their homes, retirement plans and investment security from the Wall Street establishment who have failed to provide us reasonable solutions and advice or the Washington bureaucrats who were supposed to protect us with regulatory oversight.

The answers may be found at the
FreedomFest World Economic Summit
Atlantis Resort, Paradise Island, Bahamas
January 28 – 31, 2009 l

Ron Holland, FreedomFest

Posted by Ronald | Report as abusive

As a Merrill Lynch client, what disturbs me more than the deal is their unwavering insistence that you follow a “buy-and-hold” investment strategy when you keep your $$$ there. That strategy has now cost me about 20% in my stock holdings since last October! How come they never tell you to short? What a bunch of lazy crooks!

Posted by Merrill Grinch | Report as abusive

Bank of America has just signed her death certificate. Greed, for the lack of a better word… bad…..especially when the entire world is unloading financials over fear.

B of A might as well get ready for a run on their stock also.

Posted by Steven Wilson | Report as abusive

Korean Development Bank has been inadvertently and effectively advertising itself lately.
What does it mean? As a matter of fact, KDB tried to buy out Lehman brothers, or the
4th biggest investment bank in America, even though the result wasn’t so good.

They didn’t agree with the price and terms of acquisitions, and within our gorvornment were
there many people who stood against the plan, so they have almost given up now.
The president of the bank said, “if we missed this oppotunity, there wouldn’t be another
chance to come korean finance industry would step up to the higher level”, and tried to
acquire Lehman brothers. That, however, seems to fail.

With that said, KDB got suddenly famous among the international finance market
through the Lehman brothers takeover battle.

It’s said that oversea media have described KDB quite differently than before this time.
So far they used to regard the bank as “south korea small bank KDB”, but that expression
isn’t used already. Up until now, the presence of South Korea at Wall Street was quite
limited, so it’d be safe to say that Korean development bank wasn’t known at all.

It’s said that the effect of advertising of KDB by this buying out was more than money
could buy. KDB’s broadly known and the name is here to stay in Wall Street. According to
one of the PR team of KDB, in rough estimation the adverting effect would deserve 2 billion dollars at least.

KDB hasn’t been successful in negotiation, but KDB’s advertised itself quite successfully.

Posted by sub | Report as abusive

The deal to purchase Merrill Lynch is a once in a lifetime opportunity. B of A will get its share of criticism for its purchase but I believe that in the long run, the deal will silence its critics. Merrill Lynch is a household investment brokerage firm and it wouldn’t be sold unless a crisis such as this happened to the company.
Always think purchase/expand when others think sell/shrink.

Posted by Isaac B. Tanihaha | Report as abusive

Ken Lewis has his work cut out for him. He made several huge bets throughout his career, and by shrewd management and consensus building with staff, has managed to succeed. The Wall Street BS boyz are greedy jerks who smoke hubris, Ken does not, he just has a clear focus to get the job done. If anyone can do it, Ken can do it.

Posted by Bill | Report as abusive

My gut feelings say there is something we dont know.
I am just guessing, the timing is weird.
they could wait 1-2 days and stock will go down buy Merrill much cheaper when everybody was panicking monday.
But they paid more . WHY ? there must be a reason.
May be they have so much loans from B o A and when Merrill fails, B o A would be in big trouble.and buy announcing the marriage they have time, which is the most precious thing nowadays in this turmoil.
But many people didnt buy this and sold B o A yesterday..
We will see.

Posted by John Sipahi | Report as abusive

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