Banks

Return to Article

BofA Won't Sweat Merrill Departures

Dan Freed

The unexpected departures this week of two of Merrill Lynch's top executives may raise doubts about Bank of America's (BAC Quote) latest acquisition, but there are lots of reasons to remain optimistic about the deal.

This week saw the exit of Greg Fleming, Merrill's president and CEO, and Robert McCann, head of the wealth management division that was widely viewed as the major prize for BofA in buying Merrill. While Merrill has seen other high level departures since the deal was announced in September, both Fleming and McCann had been assigned important-sounding new roles at the combined company.

BofA has projected it will eliminate $7 billion in costs as part of the takeover, and losing highly paid executives is an important part of accomplishing that, notes Moody's Investors Service analyst David Fanger. "If you think about the nature of mergers, there are going to be excess senior managers when you start out," he says.

Whether the departures presage a broader culture clash between New York investment bankers and Charlotte-based commercial bankers is unknowable at this point, according to Sterne Agee & Leach analyst Sean Ryan.

"To distill it down, commercial bankers tend to view investment bankers as overpaid, and investment bankers tend to view commercial bankers as dim and lazy," Ryan says.

Both analysts believe BofA generally has been successful in integrating other small and midsized commercial banks, and in the past decade there have been a number of tie-ups.

"Basically you just cull management and integrate the other company's operations into your own. That's sort of a learned skill, and few organizations have done more of it than NationsBank/Bank of America," Ryan says, alluding to the former name of the Charlotte institution that took over San Francisco-based BankAmerica in 1998.

Recent acquisitions, however, have been more of a departure from that formula, as BofA has bumped up against government rules that prohibit any one bank from owning more than 10% of the nation's deposits. As a result, it has had to branch out into new lines of business.

Fanger deems the 2006 acquisition of credit card company MBNA a success, in part because former MBNA president Bruce Hammond stuck around to run the credit card operations for BofA. Fanger believes Hammond's recent retirement was legitimately for personal reasons, not because of an internal clash with executives at the acquiring institution.

But the Merrill acquisition presents a special challenge, Fanger argues, because personal relationships between investment banking executives or financial advisers and their clients are far more important than is the case in branch banking. However, he believes BofA is aware of this, and has already negotiated retention packages with several of Merrill's top financial advisers. Those deals help to limit the potential damage from the departure of McCann, who oversaw that business, Fanger says.

However, Fanger sees a bad precedent for the Merrill deal in NationsBank's acquisition of Montgomery Securities in 1997. "Although they did have employee lockups for a period of time, over the couple of years following the merger there were some pretty significant employee defections."

However, another analyst who would not go on the record because he is not authorized by his employer to do so, says BofA emerged from the deal with a much more powerful investment banking franchise than did Montgomery CEO Tom Weisel, who went on to found investment banking boutique Thomas Weisel Partners (TWPG Quote).

A call to Weisel's office was not immediately returned. The analyst says a similar phenomenon occurred with BofA's acquisition of high net worth adviser U.S. Trust in 2006. "Have any of the people who left U.S. Trust harmed Bank of America in any way? I don't think so," he says.

This analyst says BofA's strategy differs from many other acquirers, who try to grow the revenue of the businesses they take over. By contrast, he says BofA focuses more on cutting costs than expanding revenue, with the idea that the gains from lower expenses will offset the revenue drop.

"A lot of guys from Merrill think they're going to be running circles around these yahoos from Charlotte in no time," the analyst says. "They are in for a surprise: Ken Lewis is a lot smarter than they think."