Equity finance: Merrill Lynch Bank of America Deal

The Merrill Lynch deal has been the highlight of the New Year. Bank of America is the biggest US bank in terms of assets and it has bought Merrill Lynch & Co. The government of United States has provided aid to the acquisition. It has been reported to extend more aid to absorb the losses that the Bank had incurred due to its purchase of Merrill Lynch.

The takeover was almost abandoned in December since the results of Merrill Lynch was worse than expected. In the wake of more turmoil in the financial system in the event of the failure of takeover the US insisted on it going forward. The Bank of America has acquired two money-losing companies in the last two months. These are the New York based Merrill Lynch and Calabasas and the California based Countrywide Financial Corporation. The companies have combined and have already received almost $25 billion from the US. The new aid is for the completion of the crisis management. It was in September that Merrill Lynch, one of the largest securities firm in the world, was agreed to be bought by Bank of America after negotiations extending over a weekend.  This deal was considered as a fore thought after the debacle of Lehman Brothers Holdings Inc. US aid was discussed in mid December and the purchase reached completion by the 1st of January 2009. The terms are under consideration.

The rescue plan of the company has not been fully publicized and revealed. It is expected to be announced on the 20th of January along with the fourth quarter results of the BofA. There is apprehension regarding how the losses incurred by Merrill will fare on the report of the BofA, whether it is likely to report a loss or a lesser than expected profit.

The purchase of Merrill Lynch has followed the purchase of Countrywide. Both the transactions have been causing losses for the Bank. This is largely due to the decline of value of US home prices. It is worrying many people concerned if Merrill Lynch might be Bank of America’s Waterloo. The unexpected large losses in the fourth quarter are the main reason for the rising concerns. It is largely believed that Merrill might become a financial black hole. The general opinion in the market is that the acquisitions were poorly timed and it is unlikely that the Bank would be able to sustain its quarterly payout of 32¢ a share.

There is a build up of friction between the two camps of Merrill and BofA. There have been departures of executives. Top executives and troops of the company have abandoned it once the deal was made final.  Merrill’s top brokerage and investment bankers are the ones on whom BofA depended on for the success of the deal. Similarly many managers have left the Bank also. Merrill brokers have been silently wooed by rival Morgan Stanley.There have been no comments from the BofA regarding the bailout. The bailout is believed to help homeowners and boost the economy.