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Merrill Faces 'Calamity' If Deal with 'Fragile' Bank of America Collapses

Posted Sep 16, 2008 11:20am EDT by Henry Blodget in Investing, Newsmakers, Recession, Banking
Related: bac, mer, leh, gs, c, wb, wm

From ClusterStock, Sept. 16, 2008:

Has anyone seen the language in the Bank of America-Merrill merger agreement? We haven't. But given that Merrill's stock continues to tank -- and take BofA down with it -- we wonder what kinds of "outs" Bank of America has. (Update: After ending virtually flat on Monday, Merrill shares were recently up 17% on Tuesday as Bank of America shares - remember, this is an all-stock deal - rebounded from Monday's shellacking.)

Bank of America wasn't exactly a Rock of Gibraltar before the Merrill deal, and Merrill's toxic assets will now make its own capital situation even more tenuous. And CEO Ken Lewis still has yet to adequately explain why he paid $29 per share for Merrill when he likely could have had it for $15 by waiting a day.

Merrill's stock is now below where it was trading before the BofA deal was announced...and the spread between the stocks is huge. The market, therefore, appears to think there is some risk to the deal, which seems a reasonable conclusion. Needless to say, if the deal falls apart, Merrill is likely toast.

Editor's Note: In the accompanying video, Henry discusses the Bank of America-Merrill deal with Portfolio senior writer Jesse Eisinger, who says it would be a "calamity" for Merrill if the deal falls apart.

Eisinger also notes BofA was "not a particularly strong bank" prior to the Merrill transaction as it struggles to absorb Countrywide. But, he adds, Ken Lewis & Co. are "under enormous pressure" from the Fed to get this deal done, strongly suggesting it was an arranged marriage.

Concerns about the deal falling apart and/or Merrill becoming a millstone for BoA is putting additional downward pressure on financials like Morgan Stanley today -- as if AIG's woes and Goldman's weak earnings weren't enough to worry about.

See Also:
Bank of America Shareholders Wake Up and Realize They Paid Too Much For Merrill
Ken Lewis's Ringing Endorsement of Merrill: It Might Have Survived

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