Bank of America Corp. agreed to buy tottering mortgage giant Countrywide Financial Corp. in a $4 billion all-stock deal, a move that could build a bulwark against the mortgage-default crisis by protecting one of its biggest casualties from collapse.
The deal would give Countrywide 0.1822 share of Bank of America for each share they own. Based on Thursday's closing prices, that values each share of Countrywide at $7.16 each, a 7.6% discount. Countrywide shares slumped in premarket trading to $6.60.
The deal, which Bank of America doesn't expect to impact 2008 earnings excluding items, is expected to close in the third quarter. The bank expects to see $670 million in cost savings, but doesn't expect to fully realize them until 2011.
The combined company doesn't plan to originate subprime loans, a key cause of the ongoing credit crunch.
"We believe this is the right decision for our shareholders, customers and employees," said Countrywide Chairman and Chief Executive Angelo R. Mozilo.
Bank of American Chairman and CEO Ken Lewis said, "We are aware of the issues within the housing and mortgage industries. The transaction reflects those challenges. Mortgages will continue to be an important relationship product, and we now will have an opportunity to better serve our customers and to enhance future profitability."
The acquisition marks the end of a mortgage lender long known as an innovator, survivor of slumps and fierce competitor that rocketed to No. 1 in U.S. mortgage lending by the early 1990s. Countrywide lost its No. 1 position in the mid-1990s but regained it in 2004 and continued expanding its market share by hiring aggressive sales people and lowering its lending standards - leading recently to a rising tide of defaults.
During the housing boom, Countrywide was a big promoter of option adjustable-rate mortgages, which give borrowers choices of how much to pay each month and can increase a loan's balance. A smaller chunk of Countrywide's business came from subprime loans, a type of lending that now has nearly vanished, but Countrywide still has exposure to past subprime loans and other risky mortgages.
"From the Countrywide stockholder perspective, this is manna from heaven," said analyst Richard X. Bove of Punk Ziegel & Co. "They've got this lousy stock and if Bank of America paper replaces Countrywide paper, they own one of the best banks in the country and they're bailed out." Countrywide shares surged 51% Thursday on the news to close on the New York Stock Exchange at $7.75. Bank of America stock closed at $39.30, up 1.5%.
For Bank of America, the deal would instantly allow it to realize its ambition of becoming a dominant mortgage lender. But it also would bring some ticking time bombs, whose powers to destroy value won't be clear at least until the housing market bottoms out, which may not be for a year or more.
Bank of America has suffered on its initial investment in the Countrywide in August, when it bought preferred shares convertible to a 16% stake for $2 billion. In the next few months, Countrywide's stock fell by more than half, including a plunge in recent days amid intensifying anxiety among investors. The bank was forced to deny earlier this week that it planned to file for bankruptcy. Its overall market value sank to $2.8 billion - equivalent to about two months of profit for Bank of America - before Thursday's bump in the stock price raised that figure to $4.5 billion.
One potential obstacle to the deal is a Federal law prohibits a bank-holding company from controlling more than 10% of U.S. deposits after acquiring another bank.
But the law includes an obscure caveat: The 10% limit doesn't apply to federally chartered thrifts, meaning a bank-holding company may control more than 10% of deposits in the U.S. following a thrift acquisition. Since a Countrywide subsidiary called Countrywide Bank is a federally insured thrift, that may give Bank of America room to maneuver around the deposit cap.
Bank of America is the only bank that has ever neared the 10% deposit cap. Many seasoned banking attorneys were not familiar with the caveat, as no bank has ever tried to acquire a thrift to vault above the 10% limit.
