Scribd
Upload
103 views2 pages

BofA Merrill - Questions

Bank of America acquired Merrill Lynch in late 2008 during the financial crisis. The boards of both companies cited synergies from combining operations as well as expanding their businesses and client bases. However, risks included massive losses that Merrill had incurred from toxic assets but not yet disclosed publicly. Valuations performed by advisors for both firms did not account for these enormous impending losses. The full extent of Merrill's losses, totaling $21 billion, was only revealed after the merger was approved.

Uploaded by

Shubham Kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
103 views2 pages

BofA Merrill - Questions

Bank of America acquired Merrill Lynch in late 2008 during the financial crisis. The boards of both companies cited synergies from combining operations as well as expanding their businesses and client bases. However, risks included massive losses that Merrill had incurred from toxic assets but not yet disclosed publicly. Valuations performed by advisors for both firms did not account for these enormous impending losses. The full extent of Merrill's losses, totaling $21 billion, was only revealed after the merger was approved.

Uploaded by

Shubham Kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Case: Bank of America Acquires Merrill Lynch: Who Pays?

Case materials:
- Bank of America Acquires Merrill Lynch: Who Pays? Insead, INS 184, 2012
- DEFM14A, Definitive proxy statement relating to merger or acquisition. Merryll Lynch, 3
November 2008. (pdf, xls)

Questions:
1. Read the reasons for the merger provided by the boards of directors of Merrill Lynch (p. 51-54)
and Bank of America (p. 54-55). Classify them conceptually into 2-5 bullet points for each firm
(synergies, operational restructuring etc.). Each bullet point should concisely summarize reasons
that could be grouped together. In addition, provide for each firm one further reason that is not on
the list yet and argue why it is important?

2. Classify the risk factors related to the merger described in the report (p. 23-26) into 2-5 bullet
points that summarize them. For each firm add also one risk factor not yet on the list and argue
why it should be considered.

3. Compare the valuations performed by the advisors to Merrill Lynch (p. 57-62) and Bank of
America (p. 63-69). Are they consistent with each other? Is there anything that makes you
concerned about the credibility of the valuations?

4. Perform a discounted dividend valuation of Merrill Lynch at the time of the merger approval in
December 2008. Use the following assumptions:
- The annual earnings in 2008 Q4 will be the same as the semiannual earnings reported in
2008 Q2 (earnings generated in 2008 Q3 and Q4 are zero). From 2009 onwards
profitability (ROA) will be positive but lower than in the pre-crisis period. Asset growth
will be moderate.
- Merrill Lynch will not issue any equity in the following years. Dividends will not change
until the leverage ratio (total equity/total assets) reaches the target level (2006 level).
Afterwards the dividend payout ratio will increase to a level at which the leverage ratio
remains stable.
Explain any additional assumptions you make. What is the value per share? Compare it with the
DCF valuations by the advisory firms.

1
5. Later, after the merger was approved, it was revealed that Merrill Lynch had $21 bn of losses in
2008 Q4. Is there any indication in the report that makes you suspect that the full extent of losses
may not have been recognized in the accounting statements of Merrill Lynch provided in the
report? Could you use any publicly available information at that time to help you predict this?

6. BofA CEO Ken Lewis knew about the losses before the merger was approved. What could be the
reasons that he did not take action?

7. Describe an important principal agent problem in Merrill Lynch at the time around the merger.
What is different about this issue compared to the previous years pointing at the severity of the
problem at the time of the merger?

8. Treasury secretary Hank Paulson and the President of the NY Fed Timothy F. Geithner were
involved in the discussions of the deal.
a) Assume that the only goal that the NY Fed and the Treasury pursued at that time was
financial stability. Did they have any incentive to influence the transaction price for the
purpose of broader financial stability? If yes in which direction?
b) Assume that their main concern was moral hazard. Would they have an incentive to
influence the price in this case? If yes in which direction?
c) Could your answers under points a) and b) be different if the method of payment in the
deal was different?

9. How would you vote as a small shareholder of:


a) Merrill Lynch
b) Bank of America
Provide the decisive argument and (if applicable) state what would make you vote differently.

You might also like