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We went into the weekend thinking Bank of America (NYSE: BAC ) might rescue Lehman Brothers (NYSE: LEH ) . In a twist that demonstrates how fluid the current environment is, Lehman is out, with B of A announcing it will acquire Merrill Lynch (NYSE: MER ) in an all-stock deal valuing the broker-dealer at $29/share or 1.8 times stated tangible book value.
A huge deal
The deal ends the 94-year independence of one of Wall Street's legendary firms and leapfrogs B of A ahead of Citibank (NYSE: C ) and JPMorgan Chase (NYSE: JPM ) as the preeminent "universal bank," offering services ranging from retail banking and auto loans to M&A, capital-raising, and wealth management.
The acquisition also underscores the gravity of the present crisis and reshapes Wall Street, leaving only two major independent investment banks: Goldman Sachs (NYSE: GS ) and Morgan Stanley (NYSE: MS ) .
Thain does his job
Despite the fact that John Thain will have had a short tenure as CEO of Merrill (there's a pretty good chance he will leave the job post-acquisition), this tie-up does him tremendous credit. Without being impeded by ego, he understood quickly that in this environment, any sign of blood can set off a "run on the bank" with ferocious speed. After Lehman, the market was focused on Merrill as the next domino -- Merrill shares lost more than a third of their value last week.
Thain was brought in to turn Merrill around, but any turnaround is contingent on survival. In an extreme market that is pitiless with wounded banks, a takeover by B of A is probably the best fate Merrill shareholders could hope for.
The takeover price may be less than 40% of Merrill's 52-week high, but it's a 70% premium to Friday's closing price. Still not convinced? Ask Lehman shareholders what they think; Lehman shares opened at $0.26 today.
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