Merrill Lynch - The End Of An Icon?
The Wall Street Journal reports today that Merrill is being bought by Bank of America. Merrill is as much representative of Americana as baseball, hot dogs and apple pie. No more.
I am reasonably confident Ken Lewis, the CEO of Bank of America, is on the wrong side of this trade. And, that this deal could even be reversed at some point in the distant future via a spinoff. Lewis made a gaffe on the Countrywide deal that cost Bank of America untold billions and now he is paying $44 billion for Merrill. Just like Countrywide, Merrill's book value is unstable and declining. There is a tremendous leap of faith involved in plunking down well over book value for a company that has an unknown book value, profit profile and cash flow characteristics. For this deal to make any sense, Merrill needs to produce substantial cash flow or profits that this company is likely never going to see again. At least not without substantial investment of additional untold billions more. But, then Lewis is already well aware of that problem because that's what is happening with his last mess, Countrywide.
Major universities have done detailed studies on mergers or takeovers of equals or near equals and their run rate at failing to meet anticipated benefits is astronomical. But, this data is generally available so we can conclude CEO ego drives much of the merger market anyway.
I outlined a post some time ago why I think this concept of a financial supermarket is ending and I'll get it up at some point. I don't know when but I promise to do so before Lewis's successor starts breaking up Bank of America. In the mean time, looks like we are likely saying good bye to Merrill Lynch and hello to a larger supermarket.
I am reasonably confident Ken Lewis, the CEO of Bank of America, is on the wrong side of this trade. And, that this deal could even be reversed at some point in the distant future via a spinoff. Lewis made a gaffe on the Countrywide deal that cost Bank of America untold billions and now he is paying $44 billion for Merrill. Just like Countrywide, Merrill's book value is unstable and declining. There is a tremendous leap of faith involved in plunking down well over book value for a company that has an unknown book value, profit profile and cash flow characteristics. For this deal to make any sense, Merrill needs to produce substantial cash flow or profits that this company is likely never going to see again. At least not without substantial investment of additional untold billions more. But, then Lewis is already well aware of that problem because that's what is happening with his last mess, Countrywide.
Major universities have done detailed studies on mergers or takeovers of equals or near equals and their run rate at failing to meet anticipated benefits is astronomical. But, this data is generally available so we can conclude CEO ego drives much of the merger market anyway.
I outlined a post some time ago why I think this concept of a financial supermarket is ending and I'll get it up at some point. I don't know when but I promise to do so before Lewis's successor starts breaking up Bank of America. In the mean time, looks like we are likely saying good bye to Merrill Lynch and hello to a larger supermarket.
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