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Bank of America's Acquisition of Merrill Lynch

Case Study - Group 4

Chiara Lo Cascio

on 6 May 2011

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Transcript of Bank of America's Acquisition of Merrill Lynch

Bank of America's Acquisition of Merrill Lynch Strategic logic of merger our advices ML flourished on Wall Street because of it's aggressively pursued growth via CDO securitization CDO market collapsed due to rapid defaulting sub-prime mortgages In 2008 BoA is the retail & commercial banking leader in the USA Inorganic growth through acquisitions Merger should proceed if Cost reduction thruogh synergies and revenue increase through growth is able to cover coordination costs for BOA
There's an explicit possibility of cultural fit
Reputation of BOA won't be damaged
BOA will be able to recover ML's losses and streamline it's organization and activities Risk of the operation stronlgy mitigated due to Government safety net Critical synergies might be exploited BOA has a solid reputation and it is preventing the global markets to fall down further by 'saving' ML Diversification mitigates risk state of art Adviced actions Stakeholders, Clients & Markets 2.Coordination putting toghether a team working on integration 3.tool An example of an adviced Balanced Scorecard CLEARLY communicate to ALL LEVELS of the organization: strategic & operating Objectives measures target values to be reached 1. challenges for Bank of america Market value dicrease BOA's share value falls 15% destroying 23bn of value High acquisition price for actual ML's value after crisis ML's 2 years of reported earning losses stated tangible book value 1.8x at least in short-run Risk of Toxic Securities Reputation criticalities case-specific general Company Culture Fit & Integration in this case i.e. harmonizing workforce remuneration which was carried on according to different pay-systems Coordination Costs Related to fit & integration after merger and in general to:
Complexity Management
Wider span of control Lack of information Deal completed in 2 days Agency costs Managers (agents) increase their power in relation to share- and stakeholders when firm-size increases
In this case, additionally: Ken Lewis might want to save his skin Risk to fail Talent retention i.e. possible exodus of financial advisors to competitors Risk of valuation distortions due to governmental help Risk of Opportunism EPS decrease 2. in case of merger 1. clearly
Communicate Transparency and clearness towards: Shareholders Communicating today's earnings losses/value losses as an investment for future greater value Transparency communicating evaluated benefits and threats before merger. Clear comunication of corporate and business objectives at all levels of the organization Invest in Employees Promoting comunication and information flows culture & vision 3. ML's 2007 and 2008 revenue losses marked down ML financial position Only way to save ML is to be acquired as fast as possible BoA's strategic objective is to become a Universal International Bank Synergies: COMPLEMENTARY Assets Exploitation SEGMENTED REVENUES BOA Strong expertise in the Consumer & Small Business Banking Weaker in the Investment Banking
(Wealth & Investment Banking business and Corporate & Investmentment Banking business) ML Strong expertise in the Investment Banking, both Corporate and Wealth Market leadership in the Consumer Banking Market leadership in the Investment Banking COMBINED BOA:
Enhances Investment Banking which was a weakness among existing businesses
Diversifies business mix furthermore

Operational Efficiency Redundancies remuval of similar functions i.e. streamlining operations into combined entities with trimming of compensation cost, which is the largest variable cost Market Expansion Economies of Scale&Scope Knowledge Transfer Economies of Learning New geographical markets
New & highly value added customer base
New value chain of products and services
New dynamic sales force BOA & ML i.e. through the acquired 16,690 Merrill Lynch advisors Financial synergy Lower taxes on earnings due to operation loss.
Tax-free acquisition due to the US Treasury Department’s rescue proposals. lowering operating costs through lowering tax expenses through Fit Both ML's and BOA's management feel the two companies would have a good fit For the record: Thank you!
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