Thursday, January 22, 2009

The Deal from Hades

In our mid-December post, we warned about the incompatibility of cultures between traditional banking and investment brokers. Now, the toxic merger between Bank of America and Merrill Lynch has gone radioactive.

Where to begin? A $50 billion merger, based on 48 hours of due diligence? What responsible executive management team would agree to go ahead on this basis? Now, there are bleatings from Bank of America's CEO that he went ahead with a merger he believed in his heart was flawed, in the national interest. It makes one teary-eyed to listen to this story, but the problem is that this was not the CEO's decision to make on his own. On a "bet the ranch" kind of call like this, the board of directors is duty-bound to take the lead and drive both process and the decision, in the best interests of the shareholders who elected them.

Soon after the merger, the head of Merrill Lynch's Wealth Management group resigned. I wonder what he knew? One of the strategic pillars for the acquisition had to be brokers from the Thundering Herd and the assets of the high end clients in the wealth management group. So this executive must have felt that whatever was coming down the road was much less desirable than giving up his retention agreement, and so the exec bolted. It was also reported that the bankers representing BofA did not get the full books on Merrill's troubled portfolios until the transaction had already closed. Did anyone report this to the board? Shouldn't someone have pulled the brake and stopped the train?

Now the capitalization of one of the most widely-held banks in the financial services sector has been wiped down to $43 billion, after the $50 billion acquisition of Merrill Lynch. The Wall Street Journal now writes that things can be salvaged by offering retention bonuses to key Merrill Lynch brokers and re-educating them in the BofA culture. Here's a secret: brokers don't like to be educated by others, and they will not abide being "re-educated." The problem is that retention these payments will now be made under duress in a bear market for high-end, fee-based services, and so BofA's poor shareholders will have to overpay...again.

Remember Peter Finch in "Network?" "I'm mad as hell, and I'm not going to take this any more!" Shouldn't someone in a position of regulatory authority be saying this now?

To use Rober Bruner's term, this indeed is "A Deal From Hell."

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