BofA Drops 17% on Merrill Deal

123jump.com Staff
15 Sep, 2008
New York City

Investors appear skeptical of Bank of America purchase of Merrill and drive BofA stock lower by 16%. Merrill after rising as much as 30% gave up half of the gains and Bank of America stock accelerated its decline in the last one hour and fell 19%. AIG facing liquidity crunch declined 45% as it seeks emergency cash. Lehman Brothers fell 93% after it sought bankruptcy protection with $613 billion in debt.

[R]1:20PM New York – Global markets sell-off. Lehman files for bankruptcy protection. Merrill Lynch carried out forced sale to Bank of America. AIG drops 45% as it faces liquidity issues.[/R]

The global markets sell-off continued as investors around the world grapple with the deepening U.S. financial market crisis. Lehman Brothers filed for bankruptcy protection and Merrill Lynch has agreed to be sold to Bank of America for $50 billion or $29 a share. AIG plunged 45%.

Lehman ((LEH)) traded 93% or $3.39 lower to 26 cents but Merrill Lynch ((MER)) rebounded $2.75 or 16% to $19.75. Bank of America declined 17% or $5.71 to $28.08.

The U.S. financial markets crisis took a sharp turn for the worst as two of the three large companies, once deemed as the pillars of the society faced their demise and one furiously looks for additional cash. Lehman Brothers after failing to find a buyer and under the weight of mounting losses in mortgage securities portfolio was forced to file chapter bankruptcy protection.

Lehman Bankruptcy Filing

Lehman Brothers Holdings Inc filed for a protection under bankruptcy at the U.S. Bankruptcy Court for the Southern District of Court with the case number 08-13555-jmp according to the filing on the bank’s Web site. The filing will not include broker dealer and asset management unit including Neuberger Berman. The fourth largest broker listed $613 billion in debt and assets of $639 billion. Lehman owes its ten largest unsecured creditors $157 billion.

Merrill Lynch Forced to Sell BofA

Merrill Lynch, a relatively healthy institution, but carrying a substantial financial leverage on its balance sheet was forced in a bargain sale to Bank of America. In the last one year Merrill had sold stocks to Middle East and Asian investors at price as high as $48 a share and agreed to sell to the company to Bank of America at $29 a share.

Ken Lewis, chief executive of the Bank of America ((BAC)) in the conference call after the said, “it was a deal of a life time” and does not expect any more deals in the near future. Bank of America in the last one year paid for $21 billion to acquire LaSalle Bank in Chicago and what most perceive as ill-timed acquisition of Countrywide Financial. Bank of America expects to complete the Countrywide acquisition by the end of third quarter of 2009 and hopes to complete Merrill Lynch integration before 2010.

In stock only deal that Bank of America will pay for each share of Merrill with 0.8595 of its stock and valued the troubled broker 60% lower than a year. Still, some executives on the Wall Street deem that Merrill got a good price and could have suffered severe price fall in coming months. The deal was apparently hammered out in less than two days over the weekend and reported by Ticker.com, a sister publication.

The price for Merrill Lynch deal is likely to fall if the stock prices of Bank of America and Merrill keep declining. Ken Lewis in the conference call suggested that the bank has expertise and wherewithal to digest three large deals and has “core competencies” and will follows “process driven steps.”

The list of large independent brokerage houses has now shrunk to only two firms, Goldman Sachs and Morgan Stanley and both try to explain how different they are from Bear Stearns and Lehman Brothers.

Goldman Sachs ((GS)) dropped $9.20 to $145, Morgan Stanley declined $3.99 to $33.23 and AIG ((AIG)) lost 49.75% of $6.13 to $6.01.

Asian Markets Review

ASX 200 index in Australia decreased 86.10 or 1.76% to close 4,817.70. The KL Composite index in Malaysia decreased 12.40 or 1.19% closed to 1,031.63. Markets in Tokyo, South Korea and Hong Kong were closed today.

SET index in Thailand closed lower 11.95 or 1.83% to 642.39 and JSE Index in Indonesia decreased 84.81 or 4.70% to 1,719.25. The Sensex index in India decreased 469.54 or 3.35% closed to 13,531.27.

Europe Markets Review

In London FTSE 100 Index traded lower 284.30 or 5.25% to 5,132.40, in Paris CAC 40 Index decreased 236.80 or 5.47% to 4,095.86 and in Frankfurt DAX index traded lower 246.23 or 3.95% to 5,988.66. In Zurich trading SMI decreased 316.21 or 4.38% to 6,899.29.