Abstract
This is a comprehensive analysis on the M&A actions of Merrill Lynch and Bank Of America. This analysis incorporates the strategic examination of the different features that shaped synergies involving these two companies, putting them as the ideal constituents for a likely merger. This analysis also enlightens on the assorted features of M&A and the approaches of Mergers and Merger incorporation procedure. This analysis clarifies Merger as a procedure, which is well planned for the improvement of both the companies involved in it.
Introduction
The Bank of America is among the world's leading monetary establishments, providing individual customers, minute, middle market companies, and big companies with a complete array of banking, asset managing, investing, and other fiscal, risk-managing goods, and services. The corporation offers unparalleled expediency in the United States, serving in excess of 59 million customer and small industry associations with in excess of 6,000 retail-banking bureaus, over 18,000 ATMs and prized online banking with virtually 24 million dynamic clients. The Bank of America is the first rated general Small Business Administration (SBA) lender in the U. S. and the first rated SBA lender to marginal-owned small companies. The corporation serves consumers in 175 countries and has associations with 99 percent of the U.S. Fortune 500 corporations and 80 percent of the Fortune Global 500. The overall stockholder’s equity was estimated at approximately $161.039 billion by the end of 3Q08. Bank of America Corporation stock shares (BAC) is listed on the New York Stock Exchange.1
On the other hand, Merrill Lynch is among the world's principal wealth managing, capital markets and advisory corporations, with bureaus in 40 countries and territories and overall consumer assets of roughly $1.5 trillion. Merrill Lynch proffers a wide variety of services to individual customers, small companies, and establishments and conglomerates, managing its actions into two interconnected business sectors ,Global Markets & Investment Banking and Global Wealth Management, which is consisted of Global Private Client and Global Investment Management. Merrill Lynch has approximately 60,900 workers and embraces a overall client asset of about $1.5T. The entire stockholder’s equity was estimated at around $38.8 billion by the conclusion of 3Q08. The company was listed on the New York Stock Exchange until Dec. 21, 2008. As of quarter-end, 3Q08, as an investment bank, it was a principal global trader and backer of securities and derivatives transversely a wide range of asset programs and serves as a strategic advisor to companies, regimes, establishments and individuals internationally. Merrill Lynch possesses about half of BlackRock, one of the world's major openly traded investment management corporations, with in excess of $1 trillion in assets under management.2
On September 15, 2008, Bank of America Corporation announced to obtain Merrill Lynch & Co., Inc. in a $50 billion all-stock deal that generated a company unmatched in its extent of fiscal services and international reach. Within the terms of the deal, Bank of America would replace 0.8595 shares of Bank of America common stock for every Merrill Lynch common share. The price was 1.8 times stated physical book worth. Bank of America anticipated achieving $7 billion in pre-tax expenditure savings, completely realized by 2012. The acquisition was anticipated to be accretive to earnings by 2010. The deal was expected to conclude in the first quarter of 2009. It was accepted by directors of both corporations and was subjected to shareholder ballots at both corporations and standard regulatory endorsements.
Within the accord, three directors of Merrill Lynch would join the Bank of America Board of Directors. The joint corporation would have management positions in retail brokerage and wealth management. By including Merrill Lynch’s in excess of 16,000 monetary advisers, Bank of America would have the leading brokerage in the world with an excess of 20,000 advisers and $2.5 trillion in consumer assets. The amalgamation conveys international scale synergies in investment management, comprising a roughly 50 percent possession in Blackrock, which boasted of $1.4 trillion in assets under management. Bank of America has about $589 billion worth in assets under management. Including Merrill Lynch both improves existing strengths at Bank of America and generates new ones, predominantly outside of the United States. Merrill Lynch attached strengths in worldwide debt supporting, global equities and global merger and acquisition advice. Subsequent to the acquisition, Bank of America was be the number one backer of global high yield debt, the third largest backer of global equity and the ninth largest adviser on global mergers and acquisitions based on pro forma of 2Q08 results.3
The conventional approach of employing the post merger incorporation phase subsequent to the deal being accomplished causes delays and resistance that invalidate the advantages from the deal. A more competent approach for a victorious merger and acquisition would stem from employing the integration procedure early on and to perform it in a extremely regimented way.4 Bank of America (BAC) has been tremendously compatible with its topical major acquisitions, carrying out the Countrywide, MBNA, and FleetBoston transactions in four to six months as initially predicted. The merger deal with Merrill Lynch & Co. (MER) assured to pursue the same path.5 Here is a fundamental chart that gives details of the stock price progress for BAC and MER prior to and subsequent to the merger.
Chart one: Share values of Bank of America vs. those of Merrill Lynch as from February’08 to February’09
As observed in the chart, the prices for each share of Bank of America and Merrill Lynch mutually are patterned correspondingly prior to the commencement of the talks. Concerning event 1, yet subsequent to the declaration of the second-quarter profit of 72 cents per share at the Charlotte headquartered bank, the share prices plummeted by 41% from a year ago. Still Bank of America had to maintain its credit loss deposits elevated, at $5.83 billion. This was in excess of triple its reserves from the year-ago quarter and replicates apprehension about its home-equity, small business, and homebuilder loan portfolios6. A few months subsequent to the thrust in its share price, consistent with event 2, the stocks of Merrill Lynch were declining owing to its incapability of continuing its business and simultaneously Bank of America publicized that it was obtaining Merrill Lynch. The Bank of America stock was sour roughly by 15 percent that morning7. Event 3 demonstrates Merrill Lynch’s stock price dropping as the corporation lost $5.2 billion, or $5.58 per share, throughout the third quarter, in relation to a loss of $2.2 billion, or $2.82 per share, a year earlier. Forecasters sampled by Thomson Reuters, on standard, predicted a loss of $5.22 per share8. As for the event 4, Bank of America intended to eradicate approximately 35,000 Merrill Lynch positions over the next three years as it operates to incorporate its acquisition of Merrill Lynch9.
The merger is a Type-C merger in which a commercial bank (BAC), whose core trade as a credit establishment is taking deposits and generating commercial loans, makes the parent of auxiliaries (MER) occupied in offering wide range of services to secret clients, small trade, and establishments and businesses, managing its actions into two interconnected business sectors. That is Global Markets & Investment Banking and Global Wealth Management, which is consisted of Global Private Client and Global Investment Management. The chart below explains the characteristic Type-C merger:
10
A Type-C Merger arrangement is motivated by regulatory concerns, which comprise terms of merger, and agreements, legal issues, tax outcomes, and accounting action. It is also motivated attributes of services entailed. Bank of America is among the world’s major financial establishments and Merrill Lynch is among the world’s foremost capital markets corporations. The merger configuration depends principally on the goods mix presented by the two companies.11It is also dependant on Demand-side issues, which get on market configuration and client inclinations.12
All in all this merger was advantageous for both MER and BAC as they will be competent to make the most favourable exploit of their resources which will assist them in generating economies of scale and achieve a competitive advantage in opposition to the competitors. This merger also helped them generate core competencies in the wealth management sector.
Previous quarter Bank of America made 4.2 billion. That was prior to paying 1.4 billion prefer-stock dividend as well as 0.4 billion salaried to the US administration. Subsequent to paying prefer-stock, dividend profit was 2.8 Billion. Thinned earnings per share were $0.44. There was roughly 6.4 billion common shares outstanding last quarter.
Strengths
The Bank Of America Corp dominates the market in the US and uses its different strengths to gain competitive advantage over its competitors and peers. It has a Strong position in the market. Bank Of America Corp is available in about 32 states in the US, the District of river and more than 30 foreign countries. In the US, it has more than 6,149 banking centres, more than 18,753 ATMs and matchless e-banking services.
Bank of America claims to be ranked number one Small Business Administration lender in the US in 2007 and has relationships with 99% of the US Fortune 500 Companies and 83% of the Fortune Global 500. It also claims to be largest online US bank with more than 24 million online banking customers in 2007. It was also the second largest retail bank in the concern in 2007 with revenues of $ 55,605 m from its retail banking business.
Strong equilibrate sheet has made it possible for the bank to take forward its expansion plans. It had an asset filler of $ 1,716 bn in 2007, an increase of 17.5% over 2006. In addition, during 2003–2007 its asset filler increased at CAGR of 23.6%. Its shareholders equity grew at an awesome CAGR of 32.3%. These figures reflect its capability and strength of managing the capital efficiently.
Bank Of America Corp has a diverse range of product; banking as well as non-banking ones. The innovations and value that it provides with its services, is its strength in attracting clients.
Weaknesses
There are complex process and banking operations that it employs and can be called its weakness. Even in sectors and areas where the company is not so large it claims to be competitive but has no effective strategy to prove it. The Bank Of America Corp total gain welfare edge has been declining since 2003. Although its gain welfare income was estimated to be around $20,505 m in 2003, it declined to $34,433 m in 2007. This means that its gain welfare edge decreased greatly 3.26% in 2003 to 2.6% in 2007.
The major reason for this decrease is the impact of multifaceted procedures having low-yield, trading-related balances and extensive density. Additionally, the financial support of the LaSalle incorporation also influenced the gain welfare edge in 2007. Though its financial performance in the last few years has been impressive, a further decline in gain welfare edge may adversely influence its forthcoming profitability.
Opportunities
Bank Of America Corp can now easily expand and enter international markets. There are constant improvement and up gradation of processes in the banking industry which is an opportunity for the company. Merrill Lynch acquisition, Countrywide Financial Corporation acquisition and the acquisition of Countrywide Home Loans are great for its growth and success in the future.
In January 2008, when bank of America acquired Countrywide Financial Corporation, digit of the largest mortgage lenders in the US, it added significant bit to its operations, adding brawny distribution and market share.
The bank also benefits from Countrywide’s broader mortgage capabilities, including its extensive retail, indiscriminate and correspondent distribution networks. Countrywide operates more than 1,000 field offices and has an income force of early 15,000.
Threats
The recent financial economic turmoil and increasing Unemployment are threats for the company. There are ever increasing in Restrictions in capital markets due to security issues and black money issues around the world. The competing banks and financial institutes are improving their strategies and policies to capture the market share and pose a threat to Bank of America Corp’s market share.
Financial terms of exchange
Cash flow statements
In a pure financial merger, the post-merger cash flows are simply the sum of the expected cashflows of the two firms if they were to continue operating independently. If the two firm's operations are to be integrated however, forecasting future cashflows is a more complex task.
BAC Ltd. is considered acquiring MER Ltd. The following information relates to BAC Ltd. for the next five years. The projected financial data are for the post-merger period. The corporate tax rate is 40% for both companies.
References
Ingo Walter (2001) Mergers and Acquisitions in Banking and Finance. ‘What works, what fails, and why.’ Chapter 4. Pg 100-103.
