Bank of America's (BAC) - Get Report $47 billion agreement to acquire FleetBoston (FBF) will cost it some earnings next year, but executives defended the richly valued deal as a good bet for the companies' shareholders and customers.
Bank of America will exchange stock worth $47 billion to acquire Fleet, adding a massive Northeastern retail franchise to its already sprawling geographical presence and relieving New England of its last major indigenous financial institution.
The transaction, which is expected to close in the first half of next year, should also put to rest months of speculation about the future of FleetBoston, seen by many as ripe for acquisition since stumbling in the post-bubble recession. The bank is coming off its first decent quarterly earnings report in more than a year, after seeing its bottom line hammered by bad loans, particularly to developing countries.
On a conference call to discuss the acquisition, Bank of America said it now expects earnings of $7.10 a share next year, down 2% from analysts' current estimate of $7.27. But the firm said it expects the deal to be accretive by about 1% in 2005 as share buybacks and synergies kick in. Analysts are currently calling for BofA to earn $7.61 a share in 2005.
Shares of Bank of America fell 10%, or $8.08, to $73.79 on news that it would buy Fleet for about $45 a share. That's a 42% premium over Fleet's share price at the close of trade on Friday.
Mike Mayo, an analyst at Prudential Securities, said that at 2.8 times book value, the deal is pricey and "may remind investors of the firm's old value-destroying ways."
Bank of America expects to take a restructuring charge of $800 million and projects after-tax synergies of $195 million per year. Cost savings should amount to $1.1 billion, which is equal to 6% of Fleet's and Bank of America's combined expense base, according to BofA's CFO James Hance. The savings should be fully realized by 2005.
"To say that BofA brings power to Fleet customers is an understatement," said Fleet CEO Charles Gifford on the call.
Gifford said that Fleet began looking into merger opportunities about a year ago. "It became increasingly clear that scale is a tremendous advantage, if properly managed," he said. "We did not have the scale of other banks."
U.S. Bancorp Piper Jaffray analyst Andrew Collins raised his rating on Fleet Monday to strong buy from outperform saying that Fleet shareholders "received an excellent price." Shares of the regional bank surged 24%, or $7.80, to $39.59 on the news.
Under terms of the agreement, FleetBoston stockholders will receive 0.5553 Bank of America common shares for each share held, valuing FleetBoston shares at about $45 based on the Oct. 22 close. Fleet closed at $31.80 Friday.
"It seems like a big premium, but I'm not unhappy," said Tim Ghriskey, president of Ghriskey Capital Management, a Connecticut hedge fund that owns shares of Fleet. Ghriskey said he had been holding shares of Fleet partly out of a belief the Boston-based bank would get bought out.
Ken Lewis, the chairman and chief executive of Bank of America, will be chief executive of the combined bank, while Gifford will be chairman.
The merged entity will be among the largest financial companies in the country and the biggest in terms of consumer banking. According to the companies, Bank of America will have almost 10% of the banking deposits in the U.S., 5,700 retail banking offices and 16,500 automatic teller machines. The combined company earned $10 billion through the first nine months of 2003, a rate that makes it among the most profitable companies on earth.
The combined company will have about $933 billion in assets, making it the second-largest bank in the country by that measure behind
, and surpassing
. It expects to have $499 billion in loans and leases and $542 billion in deposits.
The deal is the biggest by BofA in five years, since its merger with NationsBank. In that deal, NationsBank technically acquired BofA, but retained the BofA name.
The firm will serve 30% of the businesses operating in its 29-state franchise, with the largest share of middle market and large corporate relationships, including more than 95% of the Fortune 500. It will also operate the largest private bank in the U.S. and the third-largest bank-owned brokerage. With $470 billion in assets under management, the wealth management business will be the ninth largest in the country.
Ghriskey said the deal fills the one big hole in BofA's retail business, which was its weakness in the northeast, adding it will likely put pressure on J.P. Morgan to make an acquisition of its own. Ghriskey said one reason BofA paid so much for Fleet was to prevent other suitors trying to top its bid. Citigroup officials have made no secret that they are looking at doing some big bank deals in the coming year.
For the moment, the transaction has the added benefit of taking the focus off Bank of America's role in the mutual fund trading scandal. To date, BofA's Nations Fund mutual fund business has been accused of some of the worst trading abuses in the evergrowing mutula fund scandal. A former BofA broker has been criminally charged with helping a New Jersey hedge fund make illegal late trades in shares of some mutual funds.