Bank of America: Bank on This Opportunity

by: Rafael Grillo September 19, 2008 | about stocks: BAC / MER    

Rafael Grillo

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This has been a scary week indeed! It is in situations like this one that common investors like you and me tend to freeze and really don't know what to do. Most of your investments are in deep red and you wonder whether to sell and cut your losses or just weather the storm and hope for better times. Anyway, how much lower can they go? Most likely, you asked yourself that same question a few months ago – heck, a few weeks ago! – and as it seems, they could go much, much lower.

Jim Cramer likes to repeat this phrase that makes much sense in these times: nobody has ever made a penny by panicking. And what we are seeing this week is just that: sheer panic. A very justifiable panic perhaps, but panic nonetheless. What I love about these times is that the market throws the babies out with the bathwater. And I am seeing stocks that have reached prices that make no sense. Let's be clear, though: I am not saying that we've reached a bottom and that even those stocks could not go lower. Even though I'd really love to be wrong, I think there is still pain ahead of us. I wouldn't be surprised anymore if we revisited a Dow 10,000. But then, we have to look around: oil prices falling, commodity prices falling, an election coming soon, and finally some consolidation in the financial sector. Weren't high oil and commodities prices driving potential inflation and a squeeze in margins across the economy in the first place?

The U.S. economy fundamentals might not be strong at this point, but one thing is true: ours is a very resilient economy. Eventually, the economy will improve. And as I stated in the post entitled May you live in interesting times in my blog, the true leaders will come out of these dark times stronger and more powerful.

In the financial sector, I am particularly excited about one strong, clever player: Bank of America (BAC). Exactly as described in the referred post, Bank of America has been pondering the opportunities generated by this crisis and, when the time came, moved to acquire the right companies to strategically complement and strengthen its business. First it was the acquisition of Countrywide, the largest retail mortgage lender in the country. And now, it acquires nothing less than Merrill Lynch (MER), the most recognized name in the world in brokerage services and wealth management. The latter was, in my view, a brilliant move. Before this acquisition, Bank of America had few real opportunities to grow in the U.S.: it was already too big in this market. And yet, it didn't have a strong international presence to look for growth overseas. In addition, it really was a non-player in the profitable wealth management and brokerage services field. These two weaknesses are instantly turned into strengths with the acquisition of Merrill Lynch.

For sure, many have criticized this acquisition as reckless and untimely. Is this acquisition risk-free? Of course not! It is a very risky undertaking! But it is this sort of bold, aggressive move that differentiates leaders from followers. It is by taking decisive action with sound strategic vision that leadership is exerted and enhanced. Merrill Lynch is a prime franchise with global reach, and provides Bank of America with immediate access to a huge portfolio of wealthy customers and new businesses around the world at an opportunity price. It would have taken decades for Bank of America to build that infrastructure by itself.

I believe Bank of America will come out of this crisis as a financial powerhouse. Although bruised, the institution has been able to weather the crisis with relative success so far, and has taken advantage of the turmoil to gain strong footholds in areas in which it was not participating, thus creating new opportunities for growth. For the patient investor, Bank of America might really be the bank of opportunity.

Disclosure: Long BAC.

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This article has 14 comments:

  •  
    Sep 19 06:16 AM
    Maybe, but didnt Citi, under the the beloved a**hole, Sandy Weill [never understood why market guys liked this one], try this before???
    Reply | Link to Comment
  •  
    Sep 19 07:05 AM
    Great article, my concern is MBNA, Lesale, US Trust, Country Wide,
    Merrill, all in a short span of time. If they pull it off, WOW.
    Reply | Link to Comment
  •  
    Sep 19 07:48 AM
    Any company whose acquisition timing is in line with Buffet's cannot be criticized too much. Let's see though if B of A crunched the numbers as thoroughly as Warren would have.
    Reply | Link to Comment
  •  
    Sep 19 09:09 AM
    Completely agree. MER and BAC look good together.
    Reply | Link to Comment
  •  
    Sep 19 10:18 AM
    I sold my modest position in BAC today. I liked BAC up until the Merrill Lynch acquisition, and until they annouced that they might be (read that will be) cutting their dividend. Merrill Lynch does indeed involve risk, and risk of the worst kind. It's a company where the biggest assets go home at 5:00 (or at least sometime) at night.

    Will those hotshots last a year with Ken Lewis, whose determined to bring expenses down? Probably not. He'll be left with a name, and probably not to much to show for his expense other than a pretty good stream of income from the remaining clients and the asset management business.

    I loved the Countrywide deal, incidentally. The losses will work out, the mortgages originations will increase, and that mortgage servicing business in an underestimated jewel.

    Merrill--a hugely bad fit. Ken Lewis has already proved he doesn't like or know how to run a brokerage business or an investment bank.
    Reply | Link to Comment
  •  
    Sep 19 02:33 PM
    I would have appreciated this article if it was written when BAC was trading in the 27-30 range. After it has already jumped so much, and with the state of the financial markets as they are, why buy BAC at this price level? Whatever happened to buy low, sell high?
    Reply | Link to Comment
  •  
    Sep 19 05:05 PM
    On paper this is a good deal. But there are too big hurdles.

    One is BoA's capital position. Merrill may have purged itself of a lot of iffy securities, but they still have MBS and CDO exposure. Can BoA sustain further write downs without needing to raise capital with a depressed stock price? I'm guessing even odds of a capital raise going forward. Additionally, investment banking can be really profitable in good times and really unprofitable in bad times - as we're seeing now.

    Two, I'm surprised no one's mentioned the integration risk. Investment banking is not retail banking. BoA has competency in the latter - that's their core business. They will have to integrate Merrill and their personnel while still digesting Countrywide. BoA's bitten off a big mouthful for sure.

    Singapore's sovereign wealth fund apparently was averaging down into Merrill as it fell. Now it's going to end up with a bunch of BoA shares. Folks, those are my tax dollars in there. I personally own BoA. I really, really hope BoA knows what they're doing.
    Reply | Link to Comment
  •  
    Sep 19 05:16 PM
    Yahoo reports that MER shareholders may reject the deal, in which case BAC gets ~20% of MER at ~$17 - a massive call that's $10 below today's close.

    biz.yahoo.com/ap/08091...
    Reply | Link to Comment
  •  
    Sep 20 05:37 PM
    To "juan77" : Do you ever think that BAC shares can move up to $45 ? or $52 ? Come on, THINK BIG. Years ago when IBM was down to almost bottom, those people who bought now all retired to Hawaii and are the happiest guys on Earth.
    Reply | Link to Comment
  •  
    Sep 20 07:48 PM
    Thank you, Bingie. Indeed, I am writing about a strategic move that will have significant impact over the long-term, not the next-day trade. Having said that: juan77, this article was originally posted in my blog on September 17th, when BAC share price was at around $28! Be patient, though: we might still revisit that price point in the weeks to come.
    Reply | Link to Comment
  •  
    Sep 21 12:17 AM
    I agree BAC seems to be THE bank that will come out better than others. I just hope they maintain their dividends . If they touch it .I am out .
    Reply | Link to Comment
  •  
    Sep 21 01:51 AM
    Just curious...has anyone reading this article gone over the list of MER's assets? Does anyone even recall (for instance) that Merrill bought First Republic Bank (formerly FRC) just a year ago? There are other assets as well that come along with MER that BAC could only dream about getting its hands on.

    BAC is not overpaying for MER, at the same time it can be said that BAC is not underpaying as well. This is why this deal will go through. The price is about right.

    On the other hand, the AIG deal is an unbelievable steal for the Treasury. There you have to watch out. Whenever a deal is too good to be true, meaning that one party is partying at the expense of the other, expect the deal to either fall through, be replaced by another or renegotiated with the same parties.

    CrossProfit
    Reply | Link to Comment
  •  
    Sep 21 06:32 AM
    I am a little skeptical of full service brokerage business. After all - what is driving their core business and profits. Aren't we finding out that some of these brokerage lines of business requires a degree of asset appreciation, low cost of money, complexity, glut of capital and willing partners, low capital gains and customers asset base increasing. Well someday maybe but not in the near term - certainly not with one of the most radical gang of four moving in for the next four years.
    Reply | Link to Comment
  •  
    Sep 21 11:56 PM
    I am vexxed with BAC.Want to keep it and let it run but with a two day climb as we have seen and with a market that just wants to schite on itself at every whim I am skepticle. All is takes is one rumor no matter how false and this little sweetheart dream of a run will become tomorrow's nighmare and it will be time to run away fast from BAC...again
    Reply | Link to Comment
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