Stoic shareholders bless Bank of America-Merrill marriage

Shareholders of both companies support the merger; a large reduction in staff is likely to be the next announcement.
On Friday, at their respective special meetings, shareholders of both Bank of America (BoA) and Merrill Lynch approved the merger of the two institutions at a ratio of 0.8595 BoA share for every Merrill share. Details of how many voted in favour of the merger were not available.

The shareholder approval was a foregone conclusion at Merrill Lynch. For its shareholders, the merger is a lifeline. This has become even more apparent in increasingly choppy market conditions which have forced Citi and Morgan Stanley to seek bailout capital. The larger BoA balance sheet will give Merrill Lynch the ability to weather the market downturn and provide a stable source of capital from BoAÆs retail deposit base. Little wonder that Merrill shares have lost significantly less than some of its peers since September. Merrill shares gained 9.5% on Friday to $13.

The deal gives Bank of America a presence in investment banking, a business it has repeatedly tried and not succeeded in establishing a position in. But this happens at a time when the investment banking industry is being redefined and its future is not clear. BoA also acquires MerrillÆs wealth management business, which has repeatedly been cited as one of the most compelling reasons for the acquisition. Critical to the business are MerrillÆs 16,000 plus brokers and hopefully the retention bonuses BoA is offering them will induce them to stay.

BoA is committing capital, both financial and management, to a large acquisition at a time when conditions across markets, and especially in its home market in the US, look very challenging. That may explain why Bank of America shares dropped more than 50% from around $33.74 on the morning of September 15, the day the merger was announced, to around $14 on the morning of Friday, December 5. BoA shares gained 6.3% during trading on Friday to close at $15.24.

Despite the reservations that some shareholders may have, they recognise that they must stay the course that Bank of America chairman and CEO Kenneth Lewis has charted. The collapse of another financial institution would hurt markets and sentiment across the board.

"When this transaction closes, Bank of America will have the premier financial services franchise," said Lewis in a written statement. The deal Lewis has struck for BoA moves the bank to pole position among US banks on assets, larger than both J.P. Morgan and Citi.

At its third quarter earnings call posted on, Bank of America announced that Merrill CEO John Thain would lead global corporate investment banking as well as global wealth and investment management at the combined entity. Media has reported that Thain will not be getting one of the three board seats that BoA is giving Merrill representatives.

Merrill said in its third quarter earnings call that wealth management continued to be stable, citing the 160 financial advisors it had been able to hire over the quarter, taking the total to an estimated 16,800 brokers. Revenues for the division fell only 4% over the previous quarter to $3.2 billion and profit margins improved to 24% from 22% in the previous quarter. Analysts questioned the fall of around $3 billion in assets under management during the quarter, but Thain responded: ôWhen you have over $1.5 trillion of assets $2 billion to $3 billion is really flat for all practical purposes.ö

Over the same period, investment banking revenues at Merrill dropped 27%. Investment banking revenues across firms have been falling as volatile and bearish markets make it almost impossible to do any capital markets deals and tighter credit markets make financing for M&A and private equity deals a challenge.

In order to weather what is set to be a difficult 2009, investment banks are responding by cutting employee costs and making themselves as lean as possible.

The Bank of America-Merrill Lynch combine hopes to achieve pre-tax cost savings of $7 billion over the next four years, representing 10% of the expense base of the merged entity. John Thain told media in an interview in Dubai in October that he expects ôthousands'' of job losses although he suggested that support functions would bear the brunt of that. Around the same time, Merrill announced a retrenchment of around 75 people in Asia, mostly in the trading and sales divisions across both fixed-income and equities businesses and including structured finance and structured credit. The job cuts were in tandem with a global reduction and sources suggested at the time that a larger cut would probably come post-merger.

Events over the last month suggest the cuts, which are now widely referred to as RIFs, an acronym for reduction in force, will be across businesses. Citi and Credit Suisse have adopted the strategy of a one-time significant reduction in headcount, with Citi laying off around 26,000 people in mid-November and Credit Suisse cutting around 5,200 last week. At both firms, investment banking was significantly downsized. Other firms including Deutsche, Goldman Sachs, HSBC, J.P. Morgan and Morgan Stanley have been effecting cuts gradually, say sources.

Bank of America currently has 210,000 employees while Merrill Lynch has around 60,000. A 10% cost reduction in the salaries and wage bill simplistically translates to 27,000 people. All things point to a massive round of job cuts coming up at the merged entity.

US employment data released Friday suggests 533,000 jobs were cut in November. Unfortunately nothing suggests December will be better.
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