Chapter 23 New evidence of the extent of Merrill Lynch’s losses confirms

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subject Authors Robert M. Grant

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CASE 23
Bank of America’s Acquisition of Merrill Lynch
TEACHING NOTE
SYNOPSIS
In December 2008, Bank of America’s board has its final chance to withdraw from its acquisition of
Merrill Lynch. The acquisition offered Bank of America the chance to build America’s biggest wealth-
management company, and establish itself as a leading global corporate and investment bank. However,
new evidence of the extent of Merrill Lynch’s losses confirms that Bank of America is overpaying for its
acquisition.
TEACHING OBJECTIVES
The case offers students the opportunity to look beyond the traumas of the credit crisis of 2007-9, the
outrage over bankers’ greed, and the issues surrounding government regulation of the financial system to
consider some basis strategic issues concerning large financial service companies.
The case requires students consider two major strategic issues:
1. The analysis of diversification in the financial services sectorspecifically the rationale behind
the combining commercial and investment banking within “universal banks.”
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should either renegotiate or withdraw from the ML acquisition. But to do so risks the collapse of the
whole financial system. However, if BoA continues with the merger, but without informing shareholders
of the growing burden of liabilities at ML, then the BoA may be in breach of its legal responsibilities.
BoA faced an awkward ethical dilemma.
POSITION IN THE COURSE
This is a case in corporate strategy that focuses upon the strategic management of multinational,
multibusiness financial services firm. I use this as a diversification case which is also concerned with
mergers and acquisitions.
ASSIGNMENT QUESTIONS
1. Assess the strategic logic of the merger
READING
R.M. Grant Contemporary Strategy Analysis (9th edn.), Wiley, 2016, Chapter 15 External Growth
Strategies: Mergers, Acquisitions, and Alliances. In assessing the potential benefits and costs of the
CLASS ANALYSIS AND DISCUSSION
Assess the Strategic Logic of the Merger
The businesses of the two companies
The starting point for the analysis is to identify the business of the two companies. At the simplest level,
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ML distinguishes two segments: “Global Markets and Investment Banking” and “Global Wealth
Management”.
Essentially we have four main sectors represented here:
Retail Banking which includes Deposit Taking (and transaction services, both ode consumers and
small businesses), Credit Cards, and Mortgage Banking (what BoA refers to as “Consumer Real
Estate”)
The figure below shows the extent to which BoA and ML overlap in the services they provide.
We can see that there is considerable overlap between the twoespecially in the areas of wealth
management and investment banking. The key differences are:
ML’s greater international scopeits global position in investment banking in particular
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Hence, the major impact on BoA of acquiring ML are twofold:
1. Massively increasing BoA’s US wealth management business (especially though the
addition of ML huge network of 16,000 financial advisors)
Advantages of the merger
Benefits of scale and market presence through horizontal integration in wealth management. The
combination of brokerage, financial advice and planning, investment services, and private
banking activities of the two companies has created a colossus of unrivaled presence in the US.
There is considerable potential for cost savings from consolidation of operations and eliminating
duplication of functions.
Disadvantages of the merger
In many areas where BoA and ML overlap, the two companies are positioned differently, limiting
the opportunities for integration and achieving cost savings from combined functions. For
instance,
Differences in market positions also limit cross-selling opportunities: thus, BoA’s retail bank
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of dealing with multiple specialist providers of different financial services tends to be low.
Indeed, there may be risk spreading benefits from a diversity of providers.
Strategic differences between commercial and investment banking. One of the key challenges of
combining a commercial bank and an investment bank into a single “universal” bank is the wide
Cultural conflicts are also an outcome of these strategic differences. In the case of BoA and ML,
the potential cultural conflict is reinforced by historical and geographical factors. BoA’s location
in North Carolina inevitably means a cultural distance from Wall StreetAppendix 3 refers to
Ken Lewis’s distain for “Manhattan money and its ethos”. Meanwhile, ML financial advisors
apparently refer to BoA employees as “toaster salesmen”.
Assess Lewis’s Approach to Post-merger Integration
We know little Ken Lewis’s plans for how the two firms will be combined. The press release (Exhibit
1) and merger presentation (Figure 1) propose combining the Wealth Management and the Corporate
and Investment Banking activities of the two firms in order the exploit the benefits of size. Certainly a
considerable amount of integration will need to be undertaken if BoA is to achieve the projected
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important resources are reputation and peopole. Both of these resources are vulnerable. Merrill Lynch
has one of the longest established and most recognized financial service companies in the US. BoA’s
number one priority must be to avoid undermining its reputation.
Given that Merrill Lynch has by far the larger wealth management and investment banking businesses
than BoA, it would be expected that BoA would fold its wealth management and investment banking
businesses into those of ML. However, such integration may provide problematic (for many of the
reasons suggested in relation to the “Disadvantages of the merger.”
Advise Bank of America, first, on whether to proceed with the merger and, second, on
the integration of the two firms.
Whether to proceed with the merger
This is looking like a lose-lose situation for BoA. If it proceeds with the takeover it looks as though it
is overpaying for ML to full extent of the acquisition cost (on the assumption that ML is worth
precisely nothing). If it pulls out, Treasury Secretary Paulson has threatened dire consequences for
BoA.
The issues for Ken Lewis and the Board relate to the interests of BoA shareholders, the interests of the
nation (and the world’s financial system), and their legal obligations.(These issues are discussed on pp.
363-4.) The key problem is that, because of the pressured exerted on the weekend of September 14-15,
The integration of the two firms
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Assuming that the acquisition does go ahead, there are several reasons to recommend a gradual rather
than fast integration of the two firms.
1. The biggest risks seem to be from moving too quickly. There is a real risk that both of ML’s
main businessesinvestment banking and wealth managementcould suffer a chronic loss of
The is a strong case for building on existing strengths. For example, given ML’s leadership position in
investment banking and wealth management, it would seem sensible to leave in place much of ML’s
KEY TAKEAWAYS FROM THE CASE DISCUSSION
A changing business environment necessitates changes in corporate strategy
o Industry attractiveness is changing requirements adjustments to the business portfolio
Corporate strategy changes need to take account of two factors:
o The requirements of the changing external environment. Increasing global
competition (especially from emerging market producers) means that firms in the
advanced industrialized countries must upgrade their competitive advantages. Hence,
GE’s greater emphasis of innovation and meeting customer needs appears sound.
POSTSCRIPT
On January 1, 2009, BoA’s acquisition of ML was finalized under the original terms. The
acquisition value of the all-share deal was $29.1 billion. The acquisition resulted in a goodwill
addition to BoA’s balance sheet of $5.1 billion.
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January 21, 2009. ML reports 4th quarter operating losses of $21 billion.
January20, 2010. BoA reports results for 2009:
Total assets grow from $1.8 to $2.4 trillion (foreign assets triple to $383 billion)
Charges related to ML merger total $1.86 billion of which $1.2 relate to staff severance.
Cost savings form merger estimated at $3.3. billionwell ahead of target.

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