Shares of Countrywide Financial Corp. spiked 10% Friday after a report that the mortgage giant was in talks that could result in a joint venture with, or a sale to, Bank of America Corp.
The article had many on Wall Street debating the relative merits of a pairing between the two. Though acquiring Countrywide would put B of A very close to the 10% deposit cap — analysts were reluctant to state definitively whether they thought an acquisition would exceed it — several observers pointed to perceived cultural differences as a hurdle.
Most agreed, however, that a deal would be an attractive proposition for B of A, which has said it wants to be bigger in consumer lines, particularly mortgages.
And for Countrywide, a deal would resolve succession questions that have lingered since Angelo Mozilo agreed last year to keep the chief executive title for another three years.
Neither company would discuss the report, which Financial Times posted online Friday afternoon. The article, which cited unnamed sources, said the talks could lead either to an "alliance" in which B of A, the largest banking company by deposits, would make its distribution network and balance sheet available to Countrywide, the top home lender, or to an outright acquisition.
In October, Alvaro G. de Molina, then B of A's chief financial officer, talked of possibly pursuing "disruptive strategies" — a term analysts took to mean aggressive pricing, lowering fees, or other maneuvers — to pick up market share in mortgages.
Kenneth D. Lewis, B of A's chairman, president, and CEO, said in a July interview that he would consider re-entering near-prime or subprime lending, a business it mostly left in late 2001, though he said the business would be explored "in a careful way." Mortgage expansion would rely on the branches, he said, rather than buying mortgage portfolios or companies outright.
Beyond mortgages, Mr. Lewis said in an interview in October, few businesses offer opportunities for disruptive strategies. "We're kind of running out of those," he said. "There are not that many businesses where we are not a major player."
Analysts generally viewed the two companies as compatible from a business mix perspective.
"It would be a good fit, there is no doubt about that," said Ed Groshans, an analyst at Fox-Pitt, Kelton Inc. "B of A could bring funding to Countrywide that they really can't get on their own. If you can turn around and save 2, 3, or 4 basis points per loan, that's a home run." And because of Countrywide's renowned efficiency, "whatever costs B of A incurs would come down."
Brian R. Sterling, the co-head of investment banking at Sandler O'Neill & Partners LP, said Countrywide would be an attractive pickup for B of A.
"It has a lot of customers around the country who it deals with on a monthly basis and has shown good progress cross selling them," he said.
Countrywide is "the best-run, best-operated company in its business by a significant margin, and I think it is not a good, but a great company," Mr. Sterling said. "The business they are in … [has] increasingly tight margins, [is] increasingly commoditized, and you always want to be the best operator in a business like that."
However, he did point to the culture issue as one he would be watching if a deal were announced.
Countrywide has "always viewed the banks as their competitors and have been very staunch competitors against the banks, so culturally that's a question," he said.
Mr. Groshans said Wachovia Corp.'s 2006 purchase of Golden West Financial Corp., another California mortgage giant, made a sale by Countrywide likelier.
Mr. Mozilo has been competing against Herbert and Marion Sandler, who ran Golden West before the sale, "for as long as he has been in business, and they have a very nice retirement package," Mr. Groshans said.
Nancy Bush, the president of NAB Research LLC, said it would make just as much sense for JPMorgan Chase & Co. to buy Countrywide as for B of A.
JPMorgan Chase would not face the deposit cap issue, and if B of A bought Countrywide, it would get "tons and tons of escrow deposits and regular deposits," Ms. Bush said. "Remember there is a bank there. I tend to look at that and say, 'I'm not so sure.'
"We may have the right substance of the rumors but the wrong players," she said.
JPMorgan Chase declined to comment.
