Bank of America eyes Merrill Lynch acquisition

CHARLOTTE — When shareholders vote on Bank of America Corp.'s acquisition of Merrill Lynch & Co. today, they are expected to transform the bank into a business befitting its name and change the face of Wall Street.

The shotgun deal, valued at $50 billion when it was announced in September, will create the nation's largest financial services company. But it comes at the cost of independence for one of Wall Street's greatest institutions and is yet another sign that the era of big investment banks ruling the financial universe is over.

"The I-bank model is gone," Keefe, Bruyette & Woods analyst Jefferson Harralson said. "This vote is a visible piece of the changing world."

The deal, struck as the solvency of investment banks was in grave doubt, has kept Merrill from a complete meltdown like the one suffered by Lehman Brothers Holdings Inc., which was forced to file for bankruptcy.

It also prevented the company from being sold at fire-sale prices, as Bear Stearns Cos. was last March.

The acquisition enables Bank of America to expand the financial services it offers its already huge customer base, and gives Merrill the protection and limits on risk it needs to survive.

Shortly after the Bank of America-Merrill deal was announced, the two remaining big independent investment banks, Goldman Sachs Group Inc. and Morgan Stanley, applied to become bank holding companies by themselves.

In other words, the credit crisis effectively doomed the stand-alone investment bank model.

Analysts say the deal to be voted on today will help reshape the banking industry.

"No management team historically has pulled off the universal banking model and has done it well," said Tony Plath, a finance professor at the University of North Carolina at Charlotte. "This management team has the opportunity to change the industry in ways that nobody has done before."

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.

Based on Bank of America's closing price of $14.34 Thursday, the deal was valued at just less than $20 billion, or $12.33 a share; the plunge in value since the deal was announced reflects the devastating losses in financial sector stocks since then.

A strong investment bank has been the only missing piece for Bank of America, which has struggled to build from within. A series of bad bets in the investment banking unit over the past year have sunk companywide profits.

It has seen success in its retail branches, a network expanded through deals such as the $48 billion purchase of FleetBoston Financial Corp. in 2004. And Bank of America has extended its reach into credit cards after buying MBNA Corp. in 2005.

In 2007 Bank of America waded into the fight between Europe's biggest banks for ABN Amro NV and emerged with Chicago-based LaSalle Bank Corp. And this year the bank purchased Countrywide Financial Corp., making it the nation's biggest mortgage lender and loan servicer.

If the Merrill transaction goes according to plan, Bank of America will be able to offer Merrill's retail brokerage services to its huge customer base. In return, the Merrill operation will benefit from being part of a company that has a large deposit base and permanent access to financing from the government.

"This deal highlights the basic strengths of having a core deposit bank," KBW's Harralson said. "A lot of problems in the business recently have been around liquidity and funding, and that's the advantage of commercial banks."

It also means Merrill, which will now be under closer scrutiny from government regulators, won't be able to take as many risks, although that would also help it avoid the kind of catastrophic losses that have devastated Wall Street over the past year.