For BofA, nothing
fair about Merrill deal
Investment bankers made
$20 million for a weekend's work blessing a deal that has gone bad, dragging
down BofA and the whole banking sector.
Barr, senior writer
Last Updated: January 15, 2009: 1:47 PM ET
Bank of America chief Ken Lewis may need federal help just weeks after
completing the Merrill buy.
Merrill chief John Thain rushed to sell his firm as rival Lehman
Brothers teetered toward bankruptcy.
(Fortune) -- Bank of America's reported plea for more federal help has dealt
another black eye to both the entire banking sector and the badly bruised
financial advisory business.
Charlotte-based Bank of America (BAC,
Fortune 500) plunged 20% to a 14-year low Thursday morning. According to
several news reports, the government is likely to be forced to provide BofA
with a new round of taxpayer funding due to rising losses tied to the bank's
acquisition of Merrill Lynch.
overshadowed the fact that BofA rival JPMorgan Chase (JPM,
Fortune 500) reported a surprise fourth-quarter profit Thursday morning,
and raised more fears about how dire the financial conditions may be for
many leading banks.
Bank index tumbled 8% to its lowest level since 1995. Citigroup (C,
Fortune 500), which is widely expected to report its fifth-consecutive
quarterly loss and a major reorganization Friday morning, plunged 17%
Thursday. And Wells Fargo (WFC,
Fortune 500), which has been considered by analysts to be one of the
better-run banks during the credit crunch, slipped nearly 13%
latest problems also add to the questions that have been swirling about the
bank's decision, reached early on the morning that Lehman Brothers collapsed
in mid-September, to pay billions of dollars to acquire Merrill. The big
brokerage firm has been hit hard by bad bets on mortgage-related securities.
completed the Merrill deal Jan. 1 - but only after receiving assurances that
the government would help defray losses tied to the Merrill deal, The
Wall Street Journal reported late Wednesday.
Ken Lewis' decision to buy Merrill isn't the only thing that looks
questionable now. So does the advice he and the BofA board got on the
hastily arranged Merrill deal from the bank's advisers, Fox-Pitt Kelton and
J.C. Flowers & Co.
financial advisers offered opinions calling the deal fair to Bank of America
shareholders. But that conclusion seems to be undermined by the plunge in
Bank of America's shares in the months since the deal was announced, and the
bank's apparent need for another capital infusion from the government.
already has received $25 billion, including $10 billion as part of the
Merrill Deal, from the Treasury Department via the Troubled Asset Relief
Program, or TARP.
more, the bank's shareholders paid the advisers $20 million for the opinions
- which the firms formulated after investigating Merrill Lynch's condition
over a single, hectic weekend.
J.C. Flowers didn't return calls seeking comment, and Fox-Pitt Kelton
declined to comment.
of a hurried deal
documents mailed to the banks' shareholders this past fall describe the
background of the hastily arranged deal.
to the proxy documents, Merrill chief John Thain called Lewis the morning of
Saturday, Sept. 13 to propose a possible partnership in which BofA would
take a stake in Merrill. Lewis replied that he wasn't interested in taking a
minority interest in the brokerage firm but would consider a full-fledged
takeover. They agreed to continue to talk.
that afternoon meeting, and in view of the need to move expeditiously in
light of the apparently imminent bankruptcy of Lehman Brothers and
deteriorating market conditions," the proxy states, "both companies began to
arrange meetings among members of management and their advisors to discuss
the challenges and benefits of a transaction and to undertake their
respective business, financial, operational and legal due diligence
firms summoned by the BofA board were Fox-Pitt Kelton and J.C. Flowers. The
next day, according to the proxy documents, BofA senior management and the
advisory firms offered the bank's board the findings of their due diligence
management presented the board with a proposal to buy Merrill in an
all-stock deal that, at the time, was valued at nearly $50 billion.
Flowers and Fox-Pitt found that the proposed price was "fair, from a
financial point of view, to Bank of America," the proxy document says.
of America board approved the deal on the morning of Monday, Sept. 15.
"Acquiring one of the premier wealth management, capital markets, and
advisory companies is a great opportunity for our shareholders," Lewis said
in a press release issued that day.
work that weekend, Fox-Pitt Kelton and J.C. Flowers got "an aggregate
amount" of $20 million from BofA, the proxy filing said, in addition to
reimbursement for out-of-pocket expenses and indemnification "for certain
liabilities that may arise out of its engagement by Bank of America and the
rendering of its opinion."
investment banker wondered why Lewis, or any other CEO, really needed a
fairness opinion in the first place.
"Considering that no one -- the government, the boards or the investors -
had any possible use for these opinions, it certainly puts the focus on why
anybody is willing to pay $20 million for them," said Gary Lutin, who runs
the Shareholder Forum corporate governance advocacy group in
that the habit of seeking fairness opinions grew out of a questionable
reading of a legal decision two decades ago, and has since devolved into an
"irrelevant ritual" that amounts to "the opposite of collecting and
considering relevant information about a possible merger."
surprisingly, Lewis has been second-guessed about his decision to pay a
premium price for Merrill ever since the deal was announced. Because BofA
shares fell so sharply between the Sept. 15 announcement and the Jan. 1
close, the transaction was worth $19 billion when it was completed.
think that we should've waited till Monday and see if they would've gone
bankrupt," Lewis said an interview aired on CBS' "60 Minutes" on Oct. 19.
"Some think we would've gotten it for, you know, dirt cheap. But my point
is, you would have a tarnished brand. You would've had chaos."
Considering that BofA's stock has lost three-quarters of its value in the
four months since the Merrill deal was announced, and that the bank is
likely to need more help from the government, it seems Lewis and his
investors may be getting their chaos anyway.
First Published: January 15, 2009: 12:59 PM ET
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