Who Got the Better Deal: B of A or Merrill Shareholders?

Merrill Lynch (NYSE: MER  ) and Bank of America (NYSE: BAC  ) shareholders both approved the latter's acquisition of the former. However, the veneer of formal votes and the hearty handshakes of chief executives mask a critical question: Who got the better deal?

On Sept. 15, B of A CEO and serial acquirer Ken Lewis offered up 0.8595 share of B of A for every Merrill share. At the time of the announcement, that valued each Merrill share at $29. Since then, however, Bank of America shares have shed more than half their value and the original offer is now worth just $13.10, or virtually zero premium to the closing price of Merrill shares on the Friday before the deal was struck. Merrill’s share price hasn’t budged much in the interim.

Why pay a premium for a starving man’s wares?
Those numbers suggest that B of A was inordinately generous, offering a massive acquisition premium for Merrill. Instead, B of A should have taken advantage of the overvaluation in its shares and its position as acquirer of last resort to give up far less of its equity. Remember that the deal was struck the same weekend that Lehman Brothers failed -- Merrill was a desperate seller.

Merrill CEO John Thain, on the other hand, made a smart, opportunistic deal with an overeager acquirer. Merrill’s alternative? Just take a look at its two main rivals: Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) have lost more than half their market value since that fateful weekend.

One other constituency is making out nicely: arbitrageurs who bet on the merger and are earning a healthy return. They need it. This year has been downright awful for merger arbitrage, with very low deal volume and large announced deals collapsing (Rio Tinto (NYSE: RTP  ) and BHP Billiton (NYSE: BHP  ) , for example) or in real jeopardy (the buyout of Canadian telco BCE (NYSE:  BCE  ) , which is supposed to close Dec. 11, for example).

More Foolishness:

In a distressed market, investors need to think defensively. That means owning companies with bullet-proof balance sheets and unassailable franchises. The team at Motley Fool Inside Value will help you find those businesses. You can see their two latest picks and get access to all past recommendations by taking a 30-day free trial now.

Fool contributor Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. Bank of America is a Motley Fool Income Investor pick. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 08, 2008, at 7:30 PM, TMFAleph1 wrote:

    Hi Harold,

    Thanks for your question. The statement wasn't meant to convey intention, just an assessment of the offer terms; i.e. BofA's offer was inordinately generous, whether they were aware of it or not.

    By the way, investment bankers have a technical knowledge of valuation, but most of them don't have a deep understanding of "value" -- if they did, they'd be managing successful hedge funds instead.

    I think Thain probably capitalized on the fact that his counterpart Ken Lewis couldn't resist the opportunity to do this deal.

    Alex Dumortier (XMFMarathonMan)

  • Report this Comment On December 08, 2008, at 8:38 PM, TMFAleph1 wrote:

    "The original $29 per share price was not real. Now that BAC stock has come down to its true value, the value of the MER acquisition is only $13 per share."

    You cannot reason based on end prices alone. The original offer price is very real in terms of the amount of equity B of A gave away. There was no reason to offer a 70% premium for Merrill shares.

    Alex Dumortier (XMFMarathonMan)

  • Report this Comment On December 08, 2008, at 11:18 PM, TMFAleph1 wrote:

    Harold,

    When I take the time to answer someone's questions in an area in which I have greater knowledge, I don't usually expect to be insulted in return. I understand the difference between market price and intrinsic value better than you do and I don't need your lessons in finance. Don't expect a response from me in future.

    Alex Dumortier (XMFMarathonMan)

  • Report this Comment On December 09, 2008, at 8:14 AM, pondee619 wrote:

    "When I take the time to answer someone's questions in an area in which I have greater knowledge"

    You make assumptions, sir. Your prose does not show a greater knowledge on any subject. If your agrument can not stand a challenge, perhaps your articles are not worth the read. Your attitude in this instance is disappointing.

  • Report this Comment On December 09, 2008, at 8:44 AM, TMFAleph1 wrote:

    poondee619,

    It's not an assumption, sir. I am perfectly open to the notion that some of my readers may know more about the subject than I do. In this case, however, I based my conclusion on the content of the question and the follow-up comments. On top of which, I happen to know Harold from previous exchanges.

  • Report this Comment On December 09, 2008, at 9:30 AM, TMFAleph1 wrote:

    poondee619,

    I can't force anyone to read my articles, I have to "ask" for readers' patronage. To do that, I have to rely on the quality of the articles -- the insight and knowledge they contain. If you don't find that my articles provide any value, I cannot fault you for refraining from reading them in future.

  • Report this Comment On December 09, 2008, at 11:17 AM, ByrneShill wrote:

    LOL, this is turning into a yahoo board.

    Harold, I think Alex's point is that Ken Lewis was in a position to get MER at almost no premium, or a very small premium. If Thain wanted to bargain too hard, Lewis could have just walked away and tell Thain "see you in a week if you're not filing chapter 11 before that". Lewis was the one with cash, cash is king in this environment, Lewis should have got the upper hand but didn't. Lewis didn't abuse his position of power, which is pretty much akin to losing money for his shareholders. I, for one, as a BAC shareholder, felt financially raped when I saw that deal.

  • Report this Comment On December 09, 2008, at 11:32 AM, TMFAleph1 wrote:

    ByrneShill,

    Thanks for your cool-headed, rational comment. I think it's no coincidence that you are trained as an engineer: In my experience, engineers have a pragmatic, objective approach to problem-solving and are less prone to bias than those with a liberal arts education (I say this as a liberal arts major).

    Best,

    Alex Dumortier (XMFMarathonMan)

  • Report this Comment On December 09, 2008, at 11:48 AM, pondee619 wrote:

    Alex:

    Your statement:

    "When I take the time to answer someone's questions in an area in which I have greater knowledge, I don't usually expect to be insulted in return. I understand the difference between market price and intrinsic value better than you do and I don't need your lessons in finance. Don't expect a response from me in future.

    Alex Dumortier (XMFMarathonMan)"

    Your motto:

    "To Educate, Amuse and Enrich"

    Please, which of the above three goals does your last reply to Harold fulfill?

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 789943, ~/Articles/ArticleHandler.aspx, 10/24/2014 9:06:50 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement