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Hedge Fund Blasts BofA-Countrywide Deal

SRM Global Fund says the agreed-to deal undervalues the troubled mortgage lender.

Countrywide Financial's

(CFC)

planned merger with

Bank of America

(BAC) - Get Bank of America Corp Report

was rushed and failed to fetch the best price, according to a letter from investor SRM Global Fund.

The letter, issued Wednesday, reiterates concerns about the terms of the deal that the Cayman Island-based hedge fund expressed Feb. 1. Run by former UBS trader Jon Wood, SRM claims that the book value for Countrywide, as of December, was around $20 a share. In January, Bank of America agreed to pay $4 billion for Countrywide, which equates to an offer of less than $8 a share.

"It appears that

Countrywide's management engaged in a rushed process to sell itself and failed to conduct that process in a sufficiently considered and diligent manner," the letter reads. "We note with concern the significant spike in the volume and price of the company's shares over the three days preceding the company's announcement of the merger."

Back in January, Bank of America's takeover bid was seen as a much-needed rescue of beleaguered Countrywide, which many believed to be tight on cash. Prior to the takeover offer, Countrywide suffered a loss of 85% of its value and experienced a much more precipitous drop in value in the days just prior to the buyout proposal.

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Many viewed the offer as a bit rich, given that BofA CEO Kenneth Lewis had already injected about $2 billion in the Calabasas, Calif.-based lender to help prop it up last summer as concerns about mortgage deterioration and Countrywide's balance sheet mounted.

SRM is not alone in its worries about the terms of the deal.

The letter comes a day after Legg Mason's Bill Miller, already the largest holder of Countrywide shares, raised its stake in the mortgage outfit to 15% and said it hasn't decided whether to vote in favor of BofA's takeover. Miller also indicated that the mutual fund may bump its stake in Countrywide to 25% and suggested that management remove a so-called poison pill that discourages competing offers.

By virtue of its original $2 billion investment in Countrywide, BofA also has a right of first refusal on any new bid that should emerge. That right means that it can simply match a rival bid for Countrywide and walk away with the company.

SRM Global believes Countrywide is well-capitalized and was taken on the cheap by BofA. The hedge fund is suggesting the bank took advantage of the negative atmosphere then surrounding the mortgage lender.

"We decided to make an investment in Countrywide Financial commencing in April 2007 based upon a fundamental view of the company's underlying asset value, the strong value of its franchise, and its ability to return to profitability," Wood's writes in his letter.

Analysts and investors alike appear to hold mixed views on which firm got the best value out of the BofA-Countrywide partnership. The deal would create a mortgage lending behemoth for BofA, assuming that further deterioration in the mortgage market does not hobble both firms over the next few years.

Friedman Billings Ramsey Group analyst Paul Miller argues that BofA paid too much for Countrywide on the back of its previous investment.

At this point, it seems investors are increasingly asking for a more formal auction to be launched in the hope a more attractive price for Countrywide might be fetched.

The shaky markets and the reluctance of lenders to provide funds for such big investments, however, might prove an impediment to other bids, which would again leave BofA as the most logical candidate to land Countrywide.

So far, a date has not been set for a vote to approve the merger plan.