Lewis on Investment Banking: "I Like It Again"

For those who  point to Kenneth Lewis' prior distaste for investment banking as the credit crisis unfolded, the Bank of America Corp. chief had this to say: "I like it again."

His comment came on a call with analysts Monday morning, just hours after B of A sealed an all-stock deal to buy the 94-year-old Merrill Lynch & Co. for about $50 billion.

Merrill Lynch, an iconic Wall Street wealth management and investment banking firm with operations in 40 countries, instantly turns B of A, already a behemoth in banking, into a money management giant with 20,000 financial advisers – 16,000 of them coming from Merrill.

When the deal closes in the first quarter of 2009 – pending shareholder and regulator approval – B of A, in addition to its vast deposit-gathering and lending machines, will be a major player in stock underwriting, mergers and international wealth management. The Charlotte company said it has its sights set on rapid growth in the latter business line, with India, China, Russia, Brazil and parts of the Middle East as key targets.

"This was a unique opportunity … that truly creates a firm that is unparalleled in the industry," Mr. Lewis said on the call.

Mr. Lewis led an urgent, 48-hour round of talks over the weekend, trying to hammer out a deal amid mounting concern about spreading weakness in the financial system. One of Merrill Lynch's Wall Street brethren, Lehman Brothers Holding Corp., filed for Chapter 11 bankruptcy Monday, after it made a frantic but unsuccessful push to secure a buyer over the weekend.

B of A, in fact, was among those to take a look but ultimately pass on Lehman after federal authorities said they would not intervene to save the troubled brokerage house.

Despite the turmoil and reports of Merrill Lynch's own concerns that it might be headed the way of Lehman – it has posted billions of dollars in mortgage-related losses – Mr. Lewis said his company's review showed that Merrill Lynch "had the liquidity and capacity to see this through," that the deal was much more about seizing upon "a rare opportunity" to rapidly grow his company than playing the role of a white knight preventing the failure of a major firm. Merrill Lynch has the largest retail brokerage operation on Wall Street and employs 60,000.

He said that, at $29 a share, B of A paid a roughly 70% premium above Merrill Lynch's market value at the close of trading last week. But Mr. Lewis said because he felt Merrill could survive on its own, and because of its massive network of financial advisers, he thought another buyer might move in had he held out for a lower price.

"We thought the long-term benefits were so overwhelming … that we elected not to roll the dice" and bargain for a lower price, Mr. Lewis said.

Under the deal, Merrill Lynch stockholders, who have seen the value of their shares drop by two-thirds this year, will get a 0.8595 share of B of A common stock for each Merrill Lynch common share.

Merrill Lynch's market value has plummeted as it has reported cumulative net losses of $19 billion over the past four quarters. Over that same period it wrote off about $39 billion on bad investments, most of them mortgage-backed securities that sunk in worth as home-loan defaults mounted.

Analysts said that, fearing conditions will only worsen the rest of this year, Merrill Lynch CEO John Thain sought a sale to avoid the worst-case scenario in which Lehman found itself.

On the call with Mr. Lewis Monday, Mr. Thain didn't discuss his company's troubles; rather he characterized the deal as a "tremendous strategic fit" that will give Merrill Lynch's army of financial advisers entrée to B of A's sprawling world of banking customers.

Mr. Lewis, for his part, did acknowledge an urgent pressure on his company to rebuild capital levels before closing the Merrill Lynch deal. His company's Tier 1 capital ratio was at about 8.5% before it closed a deal to acquire beleaguered mortgage company Countrywide Financial Corp. in July. That deal lowered B of A's tier 1 ratio close to 7%. This is well above the 6% that regulators consider a well-capitalized level, but Mr. Lewis said his company will need to further buffer its capital levels because of the inevitable hit that the Merrill Lynch deal poses.

He did not provide any specifics but said "all options" were on the table, including a possible dividend cut.

That said, Mr. Lewis has noted that the Countrywide deal has been an early success, with the expectation that the mortgage unit will contribute to B of A's earnings this year. B of A said it expects to, excluding restructuring charges, break even on the Merrill Lynch deal in the second year of the combined companies. And, after layoffs in departments where there is overlap, it expects about $7 billion in savings for the combined firms by 2012.

"We're good at this," Mr. Lewis said. "This is not our first time.”

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