BAC/MER: The Market has Spoken - Survey Says, Boooo!
On a day that the S&P is down, oh, 3-4%, BAC is down over 20%. Is it because investors fear that the bank is going bankrupt? No. Is it because investors are scared to death that Ken Lewis is going to make one deal too many (or, perhaps, two or three too many)? Oh, yeah. Over $30 billion - that’s billion - of market cap has been washed away in a single day. Why? Because of the risks inherent in a MER acquisition. Sure, the retail arm fits nicely onto the BAC platform, offering a robust retail solution to customers across the wealth spectrum. The Blackrock investment is a nice piece of paper that has readily ascertainable value. But MER bankers simply plugging into the BAC franchise? I don’t think so. And what about the risks of integration as well as the mark-to-market risks on residual exposure to toxic sub-prime assets? I’m actually surprised that BAC’s share price didn’t fall further, although much of the MER acquisition consideration has been chopped of BAC’s market cap today. Long story short, the market has spoken. The BAC/MER deal is a disaster for BAC shareholders. Ken Lewis, are you listening?
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COMMENT:
AUTHOR: dave
EMAIL: doleary@eiphanyresearch.com
URL:
DATE: 09/15/2008 04:58:25 PM
I think you have give the market 5-10 trading days on this one. BSC, LEH gone, AIG on the ropes, Frannie mess, FOMC tomorrow… the last word on market reaction is still pending. If there was ever a sell first, ask questions later enviroment this is it.
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COMMENT:
AUTHOR: Augustus
EMAIL: cmeng@yahoo.com
URL:
DATE: 09/15/2008 11:07:03 PM
Looking at this deal from a somewhat “old school” view, it is just toxic for BAC and the rest of the banking system. The theory is that MER gets access to a more stable funding source. Well, IF Merill did not have such unfathomable assets on the books with such monsterous leverage it would not ahve any trouble getting funding. Lenders have to make loans to make money. They cannot profit if there are writeoffs on cheap loans. MER would not have such a funding problem if they did not deserve it. And, IF MER was a qualified borrower, they would get the funding without much problem.
What is being carried out is a transfer of the potential MER losses to the FDIC. And that is exactly what Glass Steagell was put in place to prevent. BAC has a balance sheet with goodwill representing 50% of equity. Recall that when FNM was revealed to be using tax loss carryforwards as assets everyone finally wised up that those cannot be used to pay any bills. Which counter party to BAC will take goodwill as payment?
In almost every case, the normal banks which have gotten involved in the chase to replicat the IB transaction and deal environment have enjoyed tremendous losses as a result. Banking should still be required to be seperate from the IB business without the cross ownership. This merger is financial nonsense.
