Through aggressive acquisitions, Bank of America
So where else does the company turn to keep growing? Well, yesterday it agreed to purchase MBNA
To snag the deal, Bank of America paid a hefty premium of 31% above MBNA's Wednesday closing price. Then again, there has been a flurry of consolidation in the credit card industry lately, including Washington Mutual's
Bank of America is well versed in integrating mega-acquisitions. As a result, Wall Street will give credence to the firm's expectations of $850 million in cost savings, achieved by eliminating the companies' duplicated efforts, through 2007.
There are certainly risk factors. For one, MBNA may suffer customer losses. It has access to reams of proprietary customer information through relationships with 350 financial institutions, an advantage that allows it to hone its marketing craft and target customers effectively and efficiently. But sour-grapes collaborators might shun MBNA once the acquisition is completed.
What's more, the credit card market's growth rate has been decelerating as competition intensifies and the market nears saturation. (How many credit card mailers do you get?) Perhaps aware of the situation, the CEO of MBNA, Bruce Hammonds, said that the key reason for selling out was the slowing growth rate of the industry.
The move makes good sense. Bank of America can use its balance sheet to lower the cost of capital for its credit card business, thus allowing the company to borrow at lower rates and achieve higher spreads/margins on its business. There also may be cross-selling opportunities across the MBNA customer base, and Bank of America can leverage MBNA's marketing expertise and affinity products. For example, MBNA has affinity deals with more than 1,400 professional organizations and 900 colleges and universities. The CEO of Bank of America, Ken Lewis, referred to MBNA as a "selling machine."
However, the big component in this deal appears to be China. Recently, Bank of America agreed to shell out $2.5 billion for a 9% stake in China Construction Bank. Because of MBNA's expertise, Lewis thinks the deal for the Chinese bank is much more likely to happen. And with 1.3 billion consumers, China possesses a staggering potential for growth. With MBNA on board, Bank of America should be much better positioned to grow its business there in the years to come.
Fool contributor Tom Taulli does not own shares of companies mentioned in this article.