Just before the market close on Tuesday, I sold
, a client holding since 2003. It had been my only U.S. financial stock, and I targeted it at 3% of the portfolio.
The company has been a good proxy for domestic financial shares during good times and bad. It also has paid a healthy dividend. I viewed the stock as one to buy and hopefully hold forever.
The reason I got out is my lack of faith in big mergers. History is replete with big, and even not-so-big, mergers that did not work out, AOL-Time Warner perhaps being the most infamous.
When news broke that Bank of America was buying
, I knew I would be selling in short order, simply because of the
big mergers don't work
concept, but there are some common-sense issues with the merger itself that are important.
The obvious question is the timing. Why didn't Bank of America wait a day? Clearly Merrill Lynch would have fallen with the market on Monday, and BofA could have offered the same 50% premium on a much lower price. Bank of America CEO Ken Lewis implied that the deal may not have been there 24 hours later, noting the potential for other suitors to come in with bids. I'm not sure who else could pony up tens of billions of dollars to take on risk that might not be quantifiable.
Further, the notion that proper due diligence could be completed between Saturday morning and Sunday night is difficult to fathom. The impression was given that the companies knew each other fairly well, which seems reasonable, but in considering how quickly things have been changing in the sector from week to week, a 36-hour turnaround for a $50 billion deal seems short, considering that BofA's market cap was $134 billion at the close on Tuesday.
If part of the motivation was that Merrill Lynch might be the next one to need a lifeline, that compounds the notion that BofA paid too much.
From the perspective of Bank of America shareholders, Lewis said a dividend cut was now on the table as a result of the merger. Throughout the crisis, the dreaded news and previous failures, I had the impression that the dividend was safe. But the threat of a cut further detracts from the appeal of choosing to ride out the storm with the stock.
One contributing factor that was more price-related: The
was very close to where it was back on July 15, but BofA was 50% higher when I sold it; I took this as a gift in deciding to pull the trigger.
My colleague Barry Ritholtz made a great point the other day in praising Merrill CEO John Thain. Thain made a lot of progress in improving the balance sheet, which made the company palatable to Lewis. In that way, he got Lewis to make a bid before the stock market discounted the shares in the face of the
bankruptcy. As a result, shareholders won't get taken out and many of the employees will be able to keep their jobs.
Looking forward, there are plenty of questions to ask about future writedowns, counter-party risk and so on, and if this entire crisis is as big as some believe, there might be questions that we don't know to ask now.
The point here is to realize that very simple questions can contribute to your decision-making process with individual stocks. Additionally, this type of deal will happen again, and, while selling Bank of America may or may not turn out to be the right trade, history is on my side.
At the time of publication, Roger Nusbaum had no holding in BAC, although positions may change at any time. Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
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