Did Bank of America overpay for Merrill Lynch?

zachmckinney answered one year ago …

http://blogs.wsj.com/deals/2008/09/15/is-bank-of-america-getting-a-bargain -in-merrill-lynch/

September 15, 2008, 12:59 pm
Is Bank of America Getting a Bargain in Merrill Lynch?
Posted by Heidi N. Moore
Bank of America says it is paying a fair price for Merrill Lynch, but judging from the way BofA’s stock is getting hammered today, down 16% in midday trading, investors aren’t convinced.

BofA agreed to pay $29 a share for Merrill. The per-share price, which valued Merrill on Sunday at $50 billion, was nearly a 70% premium to Merrill’s Friday close and a 9% premium to where Merrill shares were before last week’s slide.

Overall, the price was 1.7 times Merrill’s tangible book value as of the third quarter. By comparison, Lehman Brothers Holdings last week was trading at something like 0.8 tangible book value, which is the net worth of a bank after stripping out intangible assets.

BofA gets Merrill’s investment-banking expertise and sprawling, powerful brokerage force, which is a natural fit for BofA’s own increasing focus on the “mass affluent.” About 91% of Merrill’s “Thundering Herd” of brokers is focused on the U.S., which is BofA’s strength as well. And wealth management is a stable business: its recurring revenue makes up 70% of the unit’s overall revenue, up from 59% in 2003 according to executive Bob McCann. In return, Merrill gets BofA’s stability. Still, Merrill comes with plenty of exposure to toxic assets, including $8.8 billion of gross exposure to collateralized debt obligations.

Sanford C. Bernstein analyst Brad Hintz values Merrill at $35 a share based on a sum-of-the-parts look at the business. He estimated the value of Merrill as a whole at $55.9 billion, including $12.9 billion for its stake in investment manager BlackRock, $26.7 billion for the retail brokerage arm and $16.3 billion for the capital-markets business.

Citigroup analyst Prashant Bhatia had a more generous valuation, estimating Merrill’s worth at $40 a share. Bhatia put the BlackRock stake at $9 a share, wealth management at $16 a share, and the capital markets business at $15 a share. He noted that with more than $90 billion in liquidity and a $100 billion of customer deposits, Merrill has “ample funding sources.”

“In order to prevent a confidence run on Merrill Lynch in these very tough markets, [Merrill CEO John] Thain agreed to have Merrill Lynch be acquired by Bank of America. Given the lack of feasible acquirers, and the uncertainty of future writedowns from MER’s troubled assets, we view the acquisition price as favorable,” Hintz wrote.

But Stifel Nicolaus analyst Christopher Mutascio thought BofA should have waited until Merrill’s stock slid further. “With all due respect to MER, it seems to us that the stock was headed significantly lower than its $17.05 closing price on Friday….If so, we are not sure we understand BAC’s need to pay $29 per share,” Mutascio wrote. He acknowledged BofA didn’t want to take the risk of losing Merrill to another bidder if the firm became distressed. “Still, in our view, the price paid seems high relative to what MER stock might have been if BAC waited,” he wrote today.