September 16, 2008

Investors Still Nervous About Merrill-BofA Deal

Investors Still Nervous About Merrill-BofA Deal

When Ken Lewis saw his chance to snap up Merrill Lynch & Co. there wasn't any hesitation. The Bank of America chief executive grabbed it with both hands, over a single weekend and at a 70% premium.

So why do investors seem so nervous that the deal won't happen? Even after Tuesday's sharp rebound, Merrill is trading at $20.24 a share. The implied value BofA's all-share offer is $23.94, leaving a 16% gap. That is far larger that the normal spread, of less than 10%, that would be expected on a friendly deal.

One answer is the sheer level of uncertainty in the financial sector, leaving investors unwilling to assume pretty much anything. More important, Merrill and BofA haven't yet released details of the contract. Investors don't know how tight the wording is when it comes to BofA's rights to renegotiate or walk away if there are material changes in Merrill's business performance. In such a tough environment, Merrill's profits could easily come under more pressure before the deal closes.

In addition, the speed at which the deal was done means BofA won't have had time to study Merrill's books in detail. There remains a chance that it finds something nasty lurking there.

Finally, of course, there is a chance that BofA shareholders vote down the deal if it continues to drag on the company's share price. After all, BofA was a relative rock in the financial storm and some could be angry at Mr. Lewis for diving deeper into the risky investment banking world.

But the deal is still likely to go through. Mr. Lewis rushed in to buy struggling mortgage lender Countrywide earlier in the crisis and stuck with it through tough times, despite fears that he would renegotiate or walk away.

Having grabbed a seat at Wall Street's high table, he is unlikely to give it up easily. Merrill should be trading at a discount to the offer. But 16% still looks like too much.

Write to Thorold Barker at

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