Bank of America on Monday began adding another slice to its growing financial services empire, buying Merrill Lynch in a $50 billion deal that would create a bank offering everything from fixed-income trading to credit card lending.
It will rival Citigroup Inc., the biggest U.S. bank in terms of assets.
Bank of America Corp. said early Monday it would acquire Merrill Lynch in an all-stock transaction worth about $50 billion that should lift the uncertainty shrouding Merrill since the start of the credit crisis over a year ago.
Charlotte, N.C.-based Bank of America has the most deposits of any U.S. bank, while Merrill Lynch & Co. Inc. is the world's largest and most widely recognized brokerage.
"Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders," Bank of America Chairman and Chief Executive Officer Ken Lewis said in a statement. "Together, our companies are more valuable because of the synergies in our businesses."
Under terms of the transaction, Bank of America would exchange 0.8595 shares of Bank of America common stock for each Merrill Lynch common share, the statement said.
The deal values Merrill at $29 a share. That represents a 70 percent premium over the brokerage's Friday closing price of $17.05, but well below what Merrill was worth at its peak in early 2007, when its shares traded above $98.
Merrill's shares surged $5.38, or 31.6 percent, to $22.42 in early trading Monday. Bank of America shares dropped $4.44, or 13.2 percent, to $29.30.
Merrill's stock dropped further last week as ailing Lehman Brothers Holdings Inc. raced to find to a buyer. Early Monday, Lehman, the No. 4 investment bank in the U.S., filing for Chapter 11 bankruptcy.
"First, obviously Merrill is much, much more than an investment bank. It is the best wealth management company in the world," Lewis said during a conference call. "The frustration, I think, is we were in some ways in no man's land. It has been frustrating, frankly and we've had some stop and gos. This solves that, and creates the company that instantly would have taken decades to build. We would have been frustrated for quite some time, and this just changes that. I like it again."
Bank of America said its buyout is expected to close in the first quarter of 2009. The deal been approved by directors of both companies and is subject to shareholder votes at both companies and standard regulatory approvals, the bank said.
Under the agreement, three directors of Merrill Lynch will join the Bank of America Board of Directors.
"Merrill Lynch is a great global franchise and I look forward to working with Ken Lewis and our senior management teams to create what will be the leading financial institution in the world with the combination of these two firms," Merrill Lynch Chairman and CEO John Thain said in the statement.
Strategically, most industry analysts are saying it's a good fit. If the deal goes according to plan, Bank of America will be able to offer Merrill's retail brokerage services to its huge customer base. There is not a great deal of overlap between the two companies - Bank of America does have an investment bank already, but it has never been terribly strong.
Where there is duplication, however, the combination of the two companies could result in more layoffs. Both Merrill and Bank of America have already cut thousands of investment banking jobs over the past year.
And the deal does not come without risks to Bank of America. Merrill Lynch, like many of its Wall Street peers, has been struggling with tight credit markets and billions of dollars in assets tied to mortgages that have plunged in value. Merrill has reported four straight quarterly losses, and its stock has been sliding.
Thain and Lewis said on the call that both companies have "nominal" exposure to Lehman Brothers.
Officials from the government and various banks met this weekend to discuss what to do about Lehman Brothers. When Bank of America balked at buying Lehman, the government urged it to buy Merrill instead.
The deal differs from JPMorgan Chase & Co.'s buyout in March of Bear Stearns Cos. in that Bear Stearns was sold at a steep discount and with financial backing from the Fed. While Merrill Lynch is burdened with soured real estate investments, its financial position is stronger than Bear Stearns' was.