Why is Bank of America paying $28/share for a $17 stock (Merrill)?

[alcibiades_mystery]

I can see how Merrill may bbe slightly undervalued, but 50%?

Something fucking STINKS.

[eleny]

1. At Dealbreaker...

"Bank of America is buying Merrill, the WSJ reports. The deal values the company at $44 billion, or $29 per share, a significant premium from Friday's market price. Everyone is perplexed by the premium. But if it is, as some have reported, an all stock deal and BofA shares take a significant hit in the wake of the news, the final price and the premium could be much lower."

http://dealbreaker.com/2008/09/bank-of-america-reaches-deal-t.php

[alcibiades_mystery]

3. May. might, could, would

Indeed, "everyone is perplexed."

Me, too. Something stinks.

[eleny]

6. WSJ report

http://online.wsj.com/article/SB122142278543033525.html?mod=special_coverage

ETA: "Merrill would give Bank of America strength around the world, including emerging markets such as India. And Merrill is also strong in underwriting, an area Bank of America identified last week at an investors' conference where it would like to be more aggressive."

[NMDemDist2]

2. i bet Merrill's hard assets are worth that at least n/t

[alcibiades_mystery]

4. Then they shouldn't be so desperate to sell.

[lapfog_1]

5. You got to know that there will be some "one hand washes the other" here.

Probably a lot of institutional investors that are going to be wiped out in Lehman also own shares of Merrill, so... instead of buying Lehman, they are overpaying for Merrill. And you know they got something for doing so. Something probably illegal in usual times.

[alcibiades_mystery]

8. It just reeks of smoke

[lapfog_1]

13. Actually, it reeks of monopoly.

With Bear Sterns, Lehman, and Merrill all gone, and B of A buying Countywide and Merrill, and WaMu probably gone as well, there is only a few big frogs in this rapidly shrinking pond. And the big frogs left can call the shots.

Might remind everyone of, say, the oil industry.

And we all know how competition in the oil industry has kept the price of gasoline down.

:sarcasm:

[alcibiades_mystery]

15. Citi, B of A, and JP Morgan Chase

On and on it goes...

[Bob Dobbs]

7. EVERYTHING about macroeconomic entities stinks.

The banking and investment industries are the ultimate power elite scams.

[BlooInBloo]

9. If the purchased lot size is large enough, the purchase itself can affect the supply/demand value.

[alcibiades_mystery]

11. It would drive up the price 50%

For a desperate company trying to avert bankruptcy?

[BlooInBloo]

17. I'm not up on the details - maybe so...

Or maybe that was the minimum price needed for the acquisition to actually be worth doing. Or maybe a host of other possibilities. I'll wait for Calculated Risk to give me those sorts of details.

[Yavin4]

10. If I Were A BofA Shareholder, I'd Be Dumping It Like Crazy

Unless BofA got some under the table govt guarantee, that share price makes no sense at all. None.

[alcibiades_mystery]

12. "under the table giovt guarantees"

Lehman left to dangle.

Merrill, not so much.

[lapfog_1]

18. Sounds like Bernake got the hookers from Merrill before Lehman got around to it.

But yeah, bingo. Under the table something or other.

Perhaps an agreement from Uncle Sam not to investigate any antitrust allegations against them for, say, 20 years.

[gravity]

14. Merrill was at $28 last week, went down in price, and Bank of America took advantage of the fear

When you buy a company, you usually have to bid a premium over the stock price, so it is nothing unusual.

[tannybogus]

16. Something funny is going on. Who's connected to who?

Paulson came from Lehman but they went down the tubes. He must not have had enough pull.

[nbsmom]

25. Paulson came from Goldman Sachs n/t

[SweetieD]

19. My completely uninformed, unsubstantiated theories on this...

I've heard for the past couple of months that BofA themselves are in trouble. And everyone knows Merril Lynch is on its last legs.

Theory 1: Maybe this is posturing. They BofA know a lot of people are talking about them going down. Maybe they are trying to create a false sense of security to keep confidence up among investors.

Theory 2: Paulson is under a lot of pressure not to bail out other failed institutions. BofA has seen this with Lehman Bros. The fed bailed Fannie Mae and Freddie cause they were too big to fail, Lehman bros isn't. Maybe BofA is trying to create a situation by buying Merrill at a markup where BofA becomes too big to fail, so the gov't will bail them out.

[BlooInBloo]

20. The most reasonable guess I've seen....

"It's a stock purchase, probably won't close for 3 quarters, in that time Merrill will be down to $5 a share and it will be a deal for BOA, just like Countrywide, speculation that BOA will walk away will drive down the Merrill price and result in another good deal for BOA. Lewis is pretty sharp."


(Note that its being a stock purchase (which isn't meaningless) is not a guess.)

The CR comment section I shamelessly stole the comment from:
http://www.haloscan.com/comments/calculatedrisk/7150788704807362160/?a=40159


Not saying it's true, but it's got some rationality to it.

[CoffeeCat]

21. Is this just a shell game???

Are these investment companies propping up businesses that will fail soon--to hide
major problems that will eventually lead to economic crash?

I sense a great deal of bullshit shuffling around--in order to obfuscate major, incurable
financial problems.

Possibly, the financial sector is trying to cover up as much as possible--due to the Presidential
election? If the truth is revealed about Bush's failures with respect to regulation, and allowing
corporations to run amok--despite the potential harm to our economy--this could harm the Republicans
in November. And you can probably bet on the fact that McCain has promised to continue the
Bush policies of unregulated, corrupt corporatism that these bastards have enjoyed for so long.

This is just a guess (I only have a minor in economics), but macroeconomic problems affect all of these
investment houses. Not just one or two. The problems are systemic and they are incredibly deadly. All
of these businesses are dealing with these macro issues--not just one or two. The big powerhouses are going
down, one by one--so why would one or two survive--if they've all been operating under the same malignant paradigms?

It feels as if the dominoes are tumbling--and the media and the surviving corporations are covering up
that many additional dominoes will fall.

That's my sense, anyway...feel free to disagree. At this point, we get so little truth, it's hard to
know what reality is.

[On the Road]

22. Merrill's Stock Value

has probably taken a huge hit because of the risk of bankruptcy. I would suspect everyone knows it's worth much more than that if it doesn't file for Chapter 11. If it were a smaller stock and slower timetable, BoA would probably just start buying up shares on the open market. That isn't possible with the nature of this crisis. It may also be that Treasury or other federal agencies would not allow BoA to be cutthroat -- there's a lot of discussion and socialization when these takeovers happen.

[nbsmom]

28. Wait a minute

Remember there was a moratorium on short selling 17 (?) or so financial institutions (like Lehman, Citi, WaMu)? That moratorium just expired, and the short sellers are back with a vengeance, making an already cloudy situation even muckier.

Who would even attempt to value a company like Merrill or Morgan Stanley just now? Only reason they're even going there is that you can't have Lehman and Merrill fail in one weekend. And the $$$ to fix can't be seen as coming (directly) from the gov't. Yes, we'll all end up paying more for this later. We still have to get to later, though...

[nadinbrzezinski]

23. It is called they cannot afford another domino to fall

get it now?

[alcibiades_mystery]

24. I don't understand your post

What do you mean "get it now?" Is there some point when you think I didn't understand such an obvious concept?

:shrug:

[Yavin4]

26. I Think I Know Why

Merrill is not a commercial bank, so no FDIC protection. BofA is a commercial bank, FDIC protection. Join Merrill with BofA, and both get FDIC protection when both fail together.

No?

[TahitiNut]

27. It's NOT a cash deal ... it's an all-paper deal.

BofA will be 'paying' in stock and securities ... and I'd be willing to bet some of the paper will be CountryWide paper. In any such deal, there are lots of snouts in the trough ... arbitrage fees, etc. You can bet the premiums in such a transaction are hefty and the valuation of the BofA paper open to speculation.