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How BofA became industry behemoth

September 16, 2008|Michael A. Hiltzik and E. Scott Reckard | Times Staff Writers

A.P. Giannini is remembered as the revered founder of Bank of America, but the institution that snagged Merrill Lynch & Co. in a pressure-filled takeover last weekend is very much Hugh McColl's Bank of America.

McColl was the boss of Charlotte, N.C.-based NationsBank Corp. in 1998 when it swallowed up Bank of America, then based in San Francisco. The hard-charging former Marine deftly outflanked BofA's more worldly management team to ensure that the bank would be based in Charlotte, that his directors would control the board and that his successor would be a NationsBank man.

That successor, Kenneth D. Lewis, has gone beyond fulfilling McColl's dream of running the biggest bank in the country by creating what may become a global powerhouse of retail banking, brokerage and money management. Now the question is: Can he make this deal work?

That's far from a sure thing. There are vast differences between the two corporate cultures, and the deal was thrown together so quickly that potential land mines may have been overlooked, said Rob Hegarty, a financial services industry analyst.

"It's far too early to call this a success," said Hegarty, managing director at Tower Group. "I'm calling it 'Heartland Meets Big City' -- and we know how most of those marriages end up."

New York-based Merrill Lynch has been a troubled company, hobbled by holdings of hard-to-value mortgage securities that have been written down by billions of dollars this year already.

Lewis and John Thain, Merrill's chief executive, said Monday that the write-down process had nearly run its course, but widespread suspicion exists on Wall Street that the investment firm's portfolio still harbors lots of overvalued and illiquid securities -- one reason that its very survival had begun to come into doubt.

Merrill Lynch is also known for its insular, paternalistic culture, resistant to dramatic change -- a factor in the ouster of Thain's predecessor, E. Stanley O'Neal, last fall. O'Neal, who instituted draconian staff cuts, was considered aloof and insensitive to the traditions of what many of the firm's old-timers called "Mother Merrill."

Bank of America Corp., meanwhile, has its own challenges. Since taking over from McColl in 2000, Lewis has been following his mentor's path of building BofA by acquisitions, mostly of banks with strong retail franchises in geographic regions where BofA had scant foothold, such as New England and the Midwest.

But the acquisition of Merrill Lynch, which will require shareholder and regulatory approval, caps an extraordinary yearlong surge of deal-making for Lewis, coming after the $21-billion purchase of Chicago-based LaSalle Bank from Netherlands-based ABN Amro and its $4-billion takeover of Countrywide Financial Corp., the hobbled mortgage lender.

Taken together, the three deals represent "the biggest integration challenge we've ever seen in the American banking industry," said D. Anthony Plath, an associate professor of finance at the University of North Carolina and a longtime observer of Bank of America.

But he adds that the task matches the role Lewis played under McColl. "McColl was the strategist," he said. "Lewis was the integrator."

Yet Lewis' latest acquisitions, particularly the Countrywide and Merrill Lynch deals, come with powerful strategic rationales too. Both are based on the calculation that the financial markets are undervaluing strong franchises and overreacting to short- or medium-term conditions.

Many analysts questioned the bank's fire-sale purchase of Calabasas-based Countrywide, which had been driven close to bankruptcy by losses in its portfolio of high-risk residential home loans. But at an investment conference in San Francisco on Monday, Barbara J. DeSoer, president of BofA's mortgage, home equity and insurance unit, said the wisdom of the deal would become clear when the housing market turns around.

"We saw the opportunity," DeSoer said. "Homeownership remains a fundamental goal of most Americans, and we believe the U.S. housing sector will be strong again."

Lewis made a similar point in explaining the price BofA will pay, in its shares, for Merrill Lynch -- 34% over the brokerage giant's closing price Friday, based on BofA's closing price Monday.

"We could have rolled the dice and got it at a lower price," perhaps by waiting a day or two, Lewis told securities analysts in a conference call. Merrill Lynch was vulnerable to the same crisis of confidence among trading partners and stock investors that had brought low the investment banks Bear Stearns and Lehman Bros., lending urgency to a possible rescue deal.

Lewis acknowledged that the acquisition might not add to BofA's bottom line until 2010. "But the long-term benefits are so overwhelming, it's such a strategic opportunity, that we elected not to roll the dice," he said. "I don't know anyone who's perfect at picking the absolute bottom" of an investment downturn.

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