The merger between the Bank of America and Merrill Lynch
Astute Diligence provides that there is a criterion followed before any acquisitions. Benchmarking of the performance of the company on sale is critical in that it provides the buyers with a background and stability of the shares they are about to purchase. Horizontal mergers may result in economies of scale as production is concentrated on fewer sites, labor, and capital used more intensively. It happens if companies that seek to merge are in the same line of production denoting that the business that buys will incorporate what it has been doing the acquired one. Other savings may arise from a distribution that is more efficient.
Vertical mergers may result in the stages of production process being concentrated on one site. A company offers to purchase a different company that has the same kind of goods and services only at various levels of production. Therefore, the chain of supply is shortened. In the case of the Bank of America and Merrill Lynch, a concentric merger took place. Both companies did not have similar goods, what they had been services that could be interlinked. A company that sold houses linked with a bank that provided mortgages for the purchase of the same houses. The bank intention was to become a one-stop-shop. Provide money for those willing to buy houses then give the mortgages as well.
The breach of Fiduciary Duty
In the fall of 2008, Merrill Lynch was on the precipice of bankruptcy. Bank of America, the second-largest lender in the U.S. Had just received a $25 billion TARP bailout, offered to use the taxpayers’ funds to buy Merrill Lynch for $50 billion.
However, after the financial results for 2008 were posted, Merrill’s staggering losses obliged Bank of America to back out of the deal. At the request of Federal Reserve director Ben Bernanke, Paulson ordered Bank of America to complete the acquisition of Merrill Lynch by threatening to remove the bank’s management and board of directors if they did not complete the agreement. Bank of America’s CEO, Ken Lewis agreed that Secretary Paulson did offer to cover the banks of its anticipated losses, yet was not on the forward edge to guarantee it on writing.
The US Treasury after making agreements provided the Bank of America with a $20 billion in additional Tarp funds along with a $118 billion guarantee to cover further losses on Merrell’s assets. Therefore, the struggling US taxpayers unwittingly financed Bank of America’s acquisition of Merrell Lynch, on direct orders from Treasury Secretary Henry Paulson.
One week before Merrell’s final absorption and dissolution by the Bank Merrell’s executives were paid $3.6 billion bonuses –with approval from Bank of America. Power brokers in positions like this are the embodiment of the conflicting interest –parasitic organism that results from conjoining the banking cartel and government.
Consistent with Delaware law, even when a corporation becomes insolvent, a director’s fiduciary duties are still owed to the company itself. If the company is insolvent, however, creditors become the residual interest holders and principal consistency that would be endangered by any breaches of the fiduciary duties to the corporation that diminishes the firm’s value.
In that context, creditors obtain the rights of the residual interest holders in the corporation and, as such, are permitted to bring derivative actions against directors for a breach of fiduciary duties. In case the directors of corporation experiencing financial difficulties decide to seek a strategic merger partner or to sell the company to be a more stable entity and cash out the stakeholders, the directors need to consider their fiduciary duties.
Managers should be wary about transactions where the proceeds are used for paying dividends to preferred shareholders while the ordinary investors’ interests are wiped out (Crawford, 2012). Under normal circumstances, directors owe fiduciary duties to proffered stockholders as well as current investors, but where the interest of the ordinary investors diverges from those of the preferred investors, it is possible that a director could ignore the fiduciary duty and chose to prefer the interest of the specific investors over those of the typical investors.
The purchase raised significant doubt about the degree of fiduciary duty that the board members led by Ken Lewis incurred. Despite the noted presumptions, a director may not necessarily breach the fiduciary duty of loyalty by authorizing sale transaction that results in total loss of investors. However, the process must be fulsome and deliberate.
The board members are vested with the responsibility to ensure that the shareholders do not run any risks in transactions such as this one. Since the announcement of the sale the loss accrued inflated to $150billion which, by far was a significant amount of money for the involved shareholders who at the moment did not have any knowledge of the happenings (Williams, 2009). The questions raised include if the losses were out of mere bad luck, or if the shareholders had made a poor judgment in the investment and finally, whether there was a failure to adhere to the fiduciary duty measures.
Government involvement in the merger
Mergers, however, are not meant to be of disadvantage to the buyers. It was, therefore, important to reassure the members of the public. It happened when the Attorney General Andrew Cuomo, made sure to charge the CEO Ken Lewis, as well as the board members of Bank of America for misleading the public into buying shares in a company that they had not followed the expected channels to merge with and knew from the financial condition at time of sale, would not be of significant benefit to the buyers of the stock.
Despite the argument that the merger made business sense as they tried to ensure that bankruptcy of the company would not cause public panic which, eventually happened. They also declared that in the past they had trodden carefully on the path to real estate and according to them the merger with Merrill lynch was going to be the way into the industry and with the support of the bank they hoped to revive the company and make a significant impact on the investors.
There was questionable due diligence of the operations that were undertaken in the merger. In case cooperation declines revenues and no viable prospects for the future of the business, it may be that it is in the best interest of the cooptation to effect the transaction (Crawford, 2012). Directors should be cognizant of the interference that may be drawn by the transaction and establish a record that there will never be a better alternative for investors.
Consequences
The losses accrued can be attributed to the fact that the credit ratings of the company had already been low. The Bank had also been through difficult times that called for the Federal Reserve to intervene and give some help for them bank to stabilize. The mortgage industry was at a reverse move with the property being disposed of easy and cheap making the sector more fluid.
The shareholders were not advised of the financial changes that were taking place and. Therefore, failure to keep a continuous evaluation is a breach of merger requirements. Another notable failure that occurred, even with a provision to protect the shareholders of the Bank of America from suffering significant losses in case the financial situation of the company deteriorated (Williams, 2009) The bank did not give the expected provisions and therefore, the clause was ignored.
Merge policy aims to monitor merges and prevent those considered to be against the public interest. The costs and benefits of the merge for the public must be evaluated before the government can make a decision on whether the merge can preprocess. One of the main advantages of mergers is that the combined firms may be able to rationalize. With any merger, savings can be made as head offices are closed down and combined profits allow for greater investment in research and development (Crawford, 2012).
Reference
Crawford, R. (2012). Bank of America Acquires Merrill Lynch: Who Pays? INSEAD. The Business School for the World. Retrieved from http://centres.insead.edu/social- innovation/what-we-do/documents/5824-Bank_of_America-CS-EN-0-03-2012-w.pdf
Williams, T. Mark. (2009). A Breach of Fiduciary Duty at Bank of America? Forbes. Retrieved from http://www.forbes.com/2009/02/26/bank-america-fiduciary- opinions_merrill_lynch.html
