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After biting off more than it could chew with its acquisition of Merrill Lynch (which closed less than two weeks ago), BofA has asked the Treasury for billions of dollars to help digest the fallen broker. This is on top of the $25 billion BofA received back in October, which supposedly included an extra dollop of cash for the then-pending Merrill acquisition.
None of this is very surprising. The only reason you haven't heard much about Merrill in the past few months is because BofA swarmed in and made an offer the same night Lehman Brothers filed for bankruptcy. That was just days before AIG (NYSE: AIG ) was saved, and banks like Goldman Sachs (NYSE: GS ) and Morgan Stanley (NYSE: MS ) teetered on the brink of collapse. Had BofA not been there to save the day, odds are Merrill would have been sucked down the same drain Lehman was in short order.
What is pretty shocking -- appalling might be a better word -- is that BofA actually paid top-dollar for Merrill. The original offer called for BofA to pay $50 billion -- a sizable premium to book value at the time. It was an all-stock transaction, and shares tumbled shortly thereafter, so the final purchase price came out to around $33 billion.
Seeing how the deal was struck on the day Lehman Brothers collapsed -- quite possibly the worst day in Wall Street history to get a deal done -- few could figure out exactly why BofA was willing to pay such a premium. Odds are CEO Ken Lewis could have offered Merrill CEO John Thain a warm smile and a steak dinner and Thain would have accepted without hesitation.
But even with that top-dollar price, BofA still went back hat in hand-in-hand for more bailout money. Even worse, discussions with the Treasury to get more funds apparently began in mid-December -- before the Merrill deal closed. Why BofA didn't scrap the original offer, make a new offer for significantly less, and use the stock it had planned on issuing to pay Merrill shareholders to raise the cash needed to swallow the deal isn't clear -- and the fact that BofA didn't do so is pretty disturbing.
I've been supportive of bailing out the financial system simply because it's better (and cheaper) than the alternative, a Great Depression-style banking collapse. This, however, doesn't fit that mold. Merrill Lynch shareholders were paid $33 billion, a sum few analysts could rationalize, after BofA shook down taxpayers for the second time in three months.
Anyone else find that grossly indefensible? Feel free to share you thoughts in the comment section below.
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