In business school, students learn that clear, direct communication is essential to the operation of any business entity. Communication among interrelated parties is even more important when one company acquires another. The merger between Bank of America and Merrill Lynch is an excellent example of how a breakdown in communication between company executives can have disastrous consequences for both companies involved. Indeed, the diverging viewpoints of Merrill and Bank of America executives, compounded by a huge cultural rift between the two companies, have essentially doomed the future of this ill-considered merger.
Bank of America-Merrill Lynch came into being during the weekend of Sept. 12,, one of the worst periods in financial history. That weekend, the storied investment banking firm Lehman Brothers was desperately seeking a buyer. The company, saddled with hundreds of billions of dollars in worthless loans, approached Bank of America as a potential white knight. Bank of America CEO Ken Lewis refused to buy the company unless the federal government agreed to guarantee Lehman’s non-performing assets. The Treasury refused, and Lewis planned to depart.
Instead, he received a call from Merrill Lynch’s CEO, John Thain, asking if Bank of America would be interested in purchasing Merrill Lynch. Merrill held many of the same kinds of assets that had ruined Lehman, but Thain and his team made the argument that Merrill was both larger and more diversified than its smaller rival. Lewis agreed. In particular, he coveted Merrill’s famous brokerage force, the “Thundering Herd.”
Federal regulators, fearing that Merrill could suffer the same fate as Lehman, encouraged the merger, and Lewis then directed a team of Bank of America executives to perform due diligence with regard to Merrill’s operations and assets. Such a process, which essentially is checking the health of a company that one plans to acquire, usually takes months. Bank of America’s team completed its investigation in 48 hours.
At this point, it might have been prescient for someone, anyone — a regulator, bank executive, bystander on the street — to ask Bank of America’s leadership what, exactly, the company was buying when it purchased Merrill. But, in their frenzy to get a deal done as quickly as possible, Bank of America executives failed to ask themselves that question — and government officials failed to consider whether they were blessing a union that would destroy two major banks rather than one.
Fast-forward to five months later, and we find a greatly weakened Bank of America. The company’s stock trades in a narrow band of $4 to $7, priced as if the company is close to bankruptcy. Almost all of Merrill’s most experienced and talented executives have left the company, and Merrill reported a huge fourth-quarter loss of $15.3 billion. Not surprisingly, news reports reveal that Lewis attempted to walk away from the merger in mid-December.
Shockingly, federal officials refused to allow the breakup. Federal Reserve Chairman Bernanke and Treasury Secretary Paulson both threatened to deny Bank of America future government funding if it did not see the deal through. For those investors concerned about government intervention in the economy, here is a clear example of why we should remain wary of its influence. Rather than let Bank of America deal with its own souring balance sheet, the government forced it to absorb an even more troubled bank.
Indeed, the government seemed a step behind throughout the merger. When John Thain, still acting as Merrill’s CEO, approved a payout of $4 billion dollars in bonus money to Merrill employees — conveniently before Merrill’s announcement of its massive fourth-quarter loss — government regulators were nowhere to be found. Only recently has the New York Attorney General begun to investigate the matter.
Already, more details about these payouts are coming to light. After an initial silence on the part of Bank of America executives, it appears that they, too, approved the bonus money.
Lewis, who many argue is being unfairly blamed for the outcome of the merger, has started moving forward. He flew to New York and fired Thain in less than 15 minutes. The government also agreed to provide Bank of America with $20 billion more in bailout funds and cover potential losses on $118 billion in deteriorating assets to help shore up the company’s balance sheet.
Bank of America, however, lost a great deal of irreplaceable human capital during the merger fiasco. Talented Merrill Lynch managers, including Thain and his deputies Robert McCann and Greg Fleming, no longer work at the combined company. Yet the objective of any merger is to retain the “rainmakers” — those executives with the experience and intelligence to drive profits and earnings. Lewis also announced major cutbacks for existing staff. Employees may not receive a cash bonus for at least three years and are no doubt demoralized and fearful about their future. Shareholders are furious that the company halted its dividend and that the stock trades in the single digits.
Given this roller coaster of events, the only thing one can conclude with definite certainty is that the lines of communication between Bank of America executives, Merrill executives, government officials and shareholders completely broke down. Somehow, Merrill executives failed to warn Bank of America about impending losses, and somehow Bank of America executives failed to realize that Merrill was in fact in worse shape than Lehman — maybe because they decided to buy the company in only 48 hours. Finally, regulators, in attempting to halt yet another financial collapse, chose not to consider other options for Merrill, such as a separate government bailout, a slow unwinding of its assets or even placing it into conservorship like it did for Fannie Mae and Freddie Mac.
Bank of America’s balance sheet continues to deteriorate, and it should have paid far less than it did for Merrill. Lewis, asked by one reporter to respond to the question as to why Bank of America went through with the deal rather than abandon the acquisition, stated, “We felt that it was the right thing to do for the country.”
Andrew’s column runs biweekly Thursdays. He can be reached at a.golden@cavalierdaily.com
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