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Bank of America offers $US44bn for Merrill Lynch: report
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US financial system faces dramatic shake-up on expectations of Lehman collapse 12:10 PM
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WASHINGTON/NEW YORK -- Bank of America Corp has agreed to acquire Merrill Lynch & Co Inc for $US44 billion ($A53.4 billion), according to people briefed on the matter, in a deal that will give the US bank the world's largest brokerage.

The deal came after a weekend of tense negotiations over Lehman Brothers Holdings Inc , which late Sunday teetered on the brink of liquidation, triggering concern that market participants would lose faith in other investment banks.

A Merrill Lynch spokeswoman declined comment and a Bank of America spokesman could not immediately be reached for comment.

"It catapults Bank of America into positions of strength in three businesses where they were weak," said James Ellman, portfolio manager at hedge fund Seacliff Capital."

"Now Bank of America has one of the best and largest retail brokerages in the country, one of the top investment banks in the world, and a large stake in one of the best investment managers in the world," Ellman said.

Bank of America is paying $US29 a share price, a 70 per cent premium to Merrill's share price on Friday, although Merrill's shares were trading at $US50 in May and over $US90 at the beginning of January 2007.

Stuck with some of the same toxic debt -- much of it mortgage-related -- that torpedoed Lehman's balance sheet, Merrill has been hit hard by the credit crisis and has written down more than $US40 billion over the last year.

Earlier reports in The New York Times suggested that Bank of America was in advanced talks to acquire Merrill Lynch for at least $US38.25 billion ($A46.47 billion) in stock, citing people briefed on the negotiations.

The deal comes as bankers and regulators met in New York to figure out whether to rescue Lehman Brothers Holdings Inc, and if so, how. Those talks seemed increasingly likely to result in Lehman's liquidation.

Merrill's talks with Bank of America are "advanced," according to the New York Times, and a transaction valuing Merrill at $US25 to $US30 per share could be announced as soon as Sunday night, the newspaper said. Merrill shares closed at $US17.05 on Friday.

Merrill has been hit hard by the credit crisis and has written down more than $US40 billion over the last year.

"I'm surprised that Merrill Lynch would want to sell at this point," said Bill Fitzpatrick, an analyst at Optique Capital in Milwaukee.

"They seem to be taking steps to improve their business. They have sold off a lot of their toxic assets. Merrill seems to be progressing to me."

In spite of these exposures, the bank is seen by some as undervalued, because it has the largest retail brokerage in the world by assets under management and number of brokers. Analysts have valued that business at over $US25 billion.

Merrill also has about a 45 per cent stake in the profitable asset manager BlackRock Inc, worth more than $US10 billion.

"It could be a powerful fit," said Rick Meckler, chief investment officer at LibertyView Capital Management in New York. But he added: "Merrill Lynch has significant exposures and Bank of America would need enough balance sheet to handle that."

Last month, Merrill's chief executive John Thain arranged to sell over $US30 billion in repackaged debt securities to Dallas-based private equity firm Lone Star Funds for 22 cents on the dollar.

In spite of its exposures to complex debt securities, the bank had seen by some as undervalued, in part because of its massive brokerage business, which analysts have said is worth more than $US25 billion. The brokerage is the largest in the world by assets under management and number of brokers.

Merrill also has about a 45 per cent stake in the profitable asset manager BlackRock Inc , worth more than $US10 billion.

"It could be a powerful fit," said Rick Meckler, chief investment officer at LibertyView Capital Management in New York, before news of the deal emerged.

Still, there are risks for BofA, which had little time to complete due diligence of Merrill's books, a particular concern given the complexity of the company's exposure to mortgage-related securities and other complex debt.

"While we view this clearly as a long-term positive for (Bank of America), the stock will likely not respond accordingly as investors near term will focus on greater systemic risk," Oppenheimer & Co analyst Meredith Whitney said in a report on Sunday.

Due diligence

With the brokerage and the BlackRock shares worth more than $US35 billion combined, and Merrill's market capitalisation at around $US26 billion on Friday, investors were ascribing a negative value to the investment bank, implying huge potential embedded losses.

But, this is not the first time Bank of America has done a quick acquisition. In 2005, the bank bought credit card company MBNA after less than a week of due diligence, with Lewis saying the company was comfortable with the acquisition because it knew the people and business well.

Bank of America under Lewis has in fact become renowned for large acquisitions and it has spent over $US100 billion since 2004 buying other companies.

Most recently it acquired troubled mortgage lender Countrywide Financial Corp and -- although many were sceptical about this purchase -- veteran analyst Dick Bove said last week the takeover could prove to be a master stroke by Lewis, since the government takeover of mortgage agencies Fannie Mae and Freddie Mac could fuel business for other lenders.