What if Bank of America Spins Off Merrill Lynch?
Imagine a Bank of America (BAC) that still profited from Merrill Lynch, but didn't have to deal with its headaches. If the company made the bold move to spin off its Merrill division next year, it could do just that.
According to several barometers, Bank of America has gotten financially stronger via the Merrill acquisition. Merrill's charging bulls provided 18% of Bank of America's revenue during the first nine months of 2009, and a whopping 34% of its profit. Bank of America also has a much broader client base and a more diverse revenue stream. It can build upon those gains by cross-selling retail products to Merrill customers, and vice versa.
However, the Merrill deal also came with some hefty costs, including Bank of America's CEO, Ken Lewis, who plans to retire at year-end following a string of investigations and litigation stemming from the transaction. It also came with $15.3 billion in Merrill losses, $20 billion in additional TARP funds that needed to be repaid with dilutive stock offerings, and untold legal costs and damage to the company's reputation.Though Bank of America has now repaid taxpayers' $45 billion bailout investment with a sizable return, it has also lost its good standing with regulators, lawmakers and taxpayers. Investors who are suing the company aren't very happy either. Nor are the former Merrill employees who defected due to culture shock, or the ones who stayed, but continue to bristle at their new "Bank of America-Merrill Lynch" corporate logos. There are strong arguments on both sides as to whether the benefits of the acquisition have outweighed the cost. But before the Merrill deal was discussed or announced, Bank of America shares were trading above $35. Lately they've struggled to stay above $15. If Merrill were spun off into a separate entity, some of those problems wouldn't go away, and others might even get worse. But as the chorus of public criticism reached a fever pitch in early September, one analyst suggested it might be necessary. "If the result of these entanglements is that Bank of America will be forced to divest itself of Merrill Lynch or that shareholders must pay hundreds of millions in fines then the courts will have meaningfully harmed all involved," wrote Rochdale Securities' Richard Bove. Of course, that speculation was ahead of CEO Ken Lewis' retirement announcement on Sept. 30, and there are no indications from the bank itself that a Merrill divestiture is on the table. But if all the talk in Washington about some banks being "too big to fail" leads to action, Bank of America appears to be a prime candidate for a break-up. On the bright side, Bank of America could reap some big short-term gains if a spin-off did happen. The company could also opt to retain a stake in the independent Merrill franchise -- similar to its large stake in BlackRock (BLK) -- thereby keeping exposure to some of the hardy profits it has enjoyed this year. Perhaps most importantly, it could go back to doing what it does best: Being America's biggest bank, without the notoriety of America's most controversial investment bank. Written by Lauren Tara LaCapra in New York. See all our 2010 stock picks.
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