How Bank of America Could Have Been at $20 Today

Alternative history has little to no place in investing. But it can still be fun and interesting.

With this in mind, I've calculated what Bank of America's (NYSE: BAC  ) share price would be today if the lender hadn't diluted its shareholders during the financial crisis. As you can see in the chart below, on two separate occasions, excluding Warren Buffett's $5 billion investment in 2011, B of A sauntered up to the trough of the public capital markets and engorged itself.

In May of 2010, it issued 1.25 billion shares in exchange for $13.5 billion in cash. And in February of 2010, the bank issued an additional 1.29 billion shares in order to repay its TARP funds. Taken together, along with a handful of smaller dilutive events, B of A's outstanding share count went from 6.4 billion at the beginning of 2009 to 10.8 billion today -- notably, prior to the Merrill Lynch acquisition, which closed on the last day of 2008, B of A's outstanding share count was only 5 billion.

Source: S&P's Capital IQ.

There are two relevant takeaways, here. First, the dilution in and of itself has cut B of A's share price roughly in half. Was it necessary? I don't think there's any credible argument that it wasn't; without the additional capital, B of A's shares may very well have gone to $0.

The second takeaway is that this is what happens when a financial firm gets overly acquisitive. While this is well-worn territory, it's far too easy to forget. In this day and age of growth at all costs, it's important to remember the potential damage such a strategy can sow. The obvious exception is when a bank is able to truly get a deal, as JPMorgan Chase (NYSE: JPM  ) did when it purchased Washington Mutual, Wells Fargo (NYSE: WFC  ) did when it took over Wachovia, and Huntington Bancshares (NASDAQ: HBAN  ) has done in its acquisition of two smaller banks from the FDIC.

Starting early in his tenure at the helm of B of A, the former-CEO Ken Lewis carried on the bank's habits of acquiring either direct competitors or operations that conceivably offered operational synergies. In 2004, B of A paid $47 billion for FleetBoston Financial. In 2004, it purchased credit card giant MBNA for $35 billion. In 2006, it acquired U.S. Trust from Charles Schwab (NYSE: SCHW  ) . In 2007, it bought regional lender LaSalle Bank for $21 billion. And in 2008, it fatefully took on both Countrywide Financial and Merrill Lynch.

All along the way, Lewis steadfastly refused to raise more capital. Until it was too late, that is. Up until February of 2008, B of A could have gone to the market and raised capital at $40 to $50 per share. As a result of Lewis' obstinacy, however, it didn't do so until the bank's shares were trading around $10. To add insult to injury, in 2006, B of A repurchased $14.4 billion in shares at an average price of $49.35 per share. And in 2007, it spent $3.8 billion to buy back 73 million shares at an average price of $51.42.

But that's all history. The future, at least for now, looks much better. B of A's current CEO, Brian Moynihan, has repudiated Lewis' growth-at-all-cost strategy. As Shawn Tully of Fortune recounted, upon taking the job in 2010, Moynihan promised to follow a rigid set of principles: "Sell virtually every asset unrelated to bedrock banking. Forget all acquisitions, now and forever. Don't grow total loans, but do change the mix so B of A won't be overexposed to risky consumer credit in a bad cycle."

In addition, and particularly pertinent to the present discussion, Moynihan is committed to reversing the dilution charted above. His strategy since taking over at the beginning of 2010 has been to build a "bulwark of capital" and then deliver all earnings beyond that to shareholders. "We need to get back most of the shares we issued in the crisis, that caused all the dilution," Moynihan told Fortune's Tully. Whether he can do this, of course, remains to be seen. But I think we can all agree that it's a noble objective.

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  • Report this Comment On February 21, 2013, at 12:25 PM, pondee619 wrote:

    "How Bank of America Could Have Been at $20 Today"?

    "I've calculated what Bank of America's share price would be today if the lender hadn't diluted its shareholders during the financial crisis"... "the dilution in and of itself has cut B of A's share price roughly in half" BUT

    "without the additional capital, B of A's shares may very well have gone to $0"

    So, how could Bank of America been at $20 today? IF, according to your story, BofA had not diluted it would have gone to, or approached zero. That aint $20.00. Have you ever worked for the NY Times?

  • Report this Comment On February 21, 2013, at 1:14 PM, JohnMaxfield37 wrote:

    pondee619 -

    The problem wasn't the dilution per se. As I pointed out, which you noted, the dilution was a necessary evil by 2009.

    Instead, the problem was what necessitated the dilution -- that is, the Merrill and Countrywide acquisitions.

    John

  • Report this Comment On February 21, 2013, at 4:04 PM, pondee619 wrote:

    John,

    So BofA could not have been a $20 stock today under the circumstances it found/put itself.

    "How Bank of America Could Have Been at $20 Today". It couldn't without rewritting history completely, avoiding the financial crisis.

    Then again, maybe you were right in the first place, "Alternative history has little to no place in investing", unless there is a moral to the story showing how something blew up. using, of course, the 20/20 vision of hindsight.

    Wasn't there some government ,outside influence, proding/urging/suggesting involved in the Merrill acquisition? Wasn't this acquisition seen, at the time, as a reasonable effort to help stave off the financial crisis?

  • Report this Comment On February 21, 2013, at 4:22 PM, JohnMaxfield37 wrote:

    pondee619 -

    There was. Though the prodding didn't bear down on B of A until December of 08 -- three months after the acquisition when B of A and Merrill were actually consummating the agreement. To be clear, the gov't was pushing Merrill to find a buyer in September. This is all laid out in a book by Greg Farrell.

    To your point, the moral of the story relates to imprudent acquisitions and the damage they often sow down the road.

    John

  • Report this Comment On February 22, 2013, at 9:22 AM, pondee619 wrote:

    John:

    Did the acquisitions of BofA seem imprudent at the time they were made? Did you, or any Fool writer, alert your readers to these imprudent acquisitions at the time they were made? Please provide the link to the Fool articles of the time advising readers to get out of BofA before the crash. What was the Fool consensus regarding the CounrtyWide and Merrill acquisitions at the time they were being made? Were these acquisitions imprudent at the time they were made?

    Most important, how do we take your article, apply it today to spot todays imprudent acquisitions which are sowing damage down the road?

    In short, can you assess an acquisition to be imprudent in current time, or only in hindsight? If so, HOW? An acquisition that works is brilliant, an acquisition that does not is imprudent and sows damage down the road. Please, how do you tell the difference before the result.

  • Report this Comment On February 22, 2013, at 12:42 PM, JohnMaxfield37 wrote:

    pondee619 -

    As a general rule, I believe that bank acquisitions are bad and should be avoided. Particularly under the heightened capital requirements of Basel III (assuming these get fully and finally implemented), the resulting goodwill exerts an inordinate influence on ROE. You'd rather have assets that both earn and don't count against your capital. In other words, as opposed to buying another bank, I believe that most banks would better serve their shareholders by buying Treasuries. This is merely an anecdotal observation, but I suspect it'd be supported by an analysis.

    There are two exceptions to this rule, both of which must be present. First, the acquiring bank must have a considerable history of organic book value and EPS growth, and it must distribute the vast majority of earnings to shareholders. In addition, there should be a continuity of leadership between the period of growth and the acquisition decision.

    The second exception concerns FDIC-assisted purchases. There were a lot of these in the aftermath of the S&L crisis. And we've seen a lot of them following 08-09, many of which are good purchases for two reasons. First, the sales price is pennies on the dollar if not zero. And second, these deals often come with loss-sharing agreements.

    Outside of these exceptions, which should be applied narrowly, I believe that growth by acquisition in the banking space is adverse to shareholders and should be avoided.

    John

  • Report this Comment On February 22, 2013, at 3:27 PM, pondee619 wrote:

    "...this is what happens when a financial firm gets overly acquisitive."

    OK. So, the definition of "overly acquisitive" is acquisitive except in the above two narrowly aplied exceptions and, of course, "The obvious exception is when a bank is able to truly get a deal". Three exceptions?

    What, at the time, was there to tell us that the acquisitions by: JPMorgan Chase of Washington Mutual; Wells Fargo of Wachovia; and Huntington Bancshares of its acquisition of two smaller banks from the FDIC: were truly deals? Could we know this while they are happening or only in hindsight? What, at the time they were happening, told us that JP, Wells Fargo and Huntington deals were "truly deals" and BofA's transaction were not?

    Were the deals by BofA prior to Merrill and CountyWide good deals? "And in 2008, it fatefully took on both Countrywide Financial and Merrill Lynch".

    Thank you for your time and consideration. I'd really like to be able to tell a bad bank deal from a good one as, or before, it is happening.

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