Bank of America and Merrill Lynch reached a buy-out agreement late yesterday under which BofA will absorb the once venerable Wall Street firm. Merrill will be sold for $50 billion, or $29/share, a substantial premium over its $17/share closing price on Friday.
The deal came at the tail-end of a dramatic weekend for U.S. financial firms, in which battered Lehman Brothers faced bankruptcy and insurance company AIG scrambled to raise capital to offset its plummeting share prices. While BofA initially showed interest in purchasing Lehman, it walked away after it became clear that the U.S. government would not back Lehman assets as it had done with Bear Stearns.
Merrill, which has suffered a 75 percent drop in share price since last year—including a 40 percent slip from levels since just a week ago—had suffered critical losses as a result of the subprime mortgage crisis, including $51.8 billion in mortgage-backed securities. A sale to Bank of America was viewed largely as a way of staving off eventual bankruptcy.
The NYT, citing a source briefed on the negotiations, reported that Merrill CEO John A. Thain, an alumnus of Goldman Sachs and the New York Stock Exchange, and Kenneth D. Lewis,Bank of America’s chief executive, began negotiations earlier in the summer. Thain then is said to have rebuffed the offer but prompted by the reality that a Lehman bankruptcy would ripple throughWall Street and further cripple Merrill Lynch, the two partiesproceeded with discussions.
The purchase of Merrill is being viewed as giving BofA a decisive foothold in the brokerage and underwriting industries, as well as strengthening its overall position in the current financial climate. BofA has bought up a variety of smaller institutions in recent years, including its acquisition of Countrywide Financial in July.