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

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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 sector—specifically the rationale behind

the combining commercial and investment banking within “universal banks.”

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,

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 two—especially in the areas of wealth

management and investment banking. The key differences are:

 ML’s greater international scope—its global position in investment banking in particular

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

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 Street—Appendix 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

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

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 businesses—investment banking and wealth management—could 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.

 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. billion—well ahead of target.