The two parties struck the deal at the climax of a frenzied weekend in which Lehman Brothers Holdings Inc. filed for bankruptcy protections and speculation abounded that American International Group Inc. and Washington Mutual Inc. were in deep trouble.
The Charlotte, N.C., buyer is offering 0.8595 of a Bank of America share for each Merrill Lynch common share, the banks said in a statement. The deal values Merrill stock at $29 and represents a premium of 70 percent to Merrill's closing price Friday of $17.05.
While not quite a fire-sale price, the price is equal to about 30 percent of Merrill's record high of $97.69 reached in January 2007 and is equivalent to 1.8 times stated tangible book value. By almost any definition, being able to buy the third-best name in U.S. investment banking for less than thrice tangible book value has been considered an attractive offer for Bank of America.
"Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders," Bank of America Chairman and CEO Ken Lewis said in the statement. "Together, our companies are more valuable because of the synergies in our businesses."
A union of Bank of America and Merrill Lynch would create and institution with more than 20,000 advisers and $2.5 trillion in client assets, and B of A already has the largest U.S. bank network with 6,100 retail banking offices, more than 18,500 ATMs.
Like its rival J.P. Morgan Chase & Co., Bank of America has so far weathered the financial crisis well and used it as an opportunity to grow rather than retrench. Bank of America in July agreed to buy another subprime-battered institution, mortgage lender Countrywide Financial Corp., for $2.5 billion in stock. Bank of America had also been in the hunt for Lehman Brothers before pulling out over the weekend.
J.P. Morgan also grew its investment banking and brokering business this year when it agreed in March to buy Bear Stearns & Cos.
The deal caps off a year of utter indignity for Merrill Lynch. The bank ousted then-Chief Executive Stanley O'Neal last October as its exposure to mortgage-backed assets built up losses. As of July, the company had lost $19 billion, raised about $30 billion in capital, and taken about $47 billion in total writedowns. As of last week, the market was undecided whether those problems would persist.
Merrill Lynch "remains exposed to additional writedowns through its exposure to CDOs and to residential and commercial mortgages," wrote Standard & Poor's equity analyst Matthew Albrecht in a note Thursday. "But July actions to reduce CDO positions and shore up its capital base have improved its outlook, in our view."
Lewis has been one of the most acquisitive bank chief executives in the world since becoming CEO of Bank of America seven years ago, making more than $100 billion of purchases including FleetBoston Financial Corp. and credit-card issuer MBNA Corp.
Bank of America expects to achieve $7 billion in pretax savings in the Merrill deal, fully realized by 2012. The acquisition is expected to boost earnings by 2010.
Under the agreement, three unnamed Merrill directors will join Bank of America's board. It was unclear whether Merrill Chairman and CEO John Thain has a role.
The parties expect to close the deal in the first quarter of 2009. It requires clearance from both sets of shareholders, as well as standard regulatory approvals.
Merrill Lynch sought legal advice from Shearman & Sterling. Merrill's independent directors took legal advice from a Cravath, Swaine & Moore team that included Robert D. Joffe, Susan Webster and Sarkis Jebejian.
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