Bank of America Corp. today announced it has agreed to acquire Merrill Lynch & Co., Inc. in a US$50 billion all-stock transaction.

Under terms of the transaction, Bank of America would exchange .8595 shares of its common stock for each Merrill Lynch common share. Bank of America said it expects to achieve US$7 billion in pre-tax expense savings, fully realized by 2012. The acquisition is expected to be accretive to earnings by 2010.

The transaction is expected to close in the first quarter of 2009. It has been approved by directors of both companies and is subject to shareholder votes at both companies and standard regulatory approvals. Under the agreement, three directors from Merrill Lynch will join the BofA’s board.

Te combined company becomes the world’s largest retail broker, adding Merrill Lynch’s more than 16,000 financial advisers, to give Bank of America more than 20,000 advisers and US$2.5 trillion in client assets. It also gives BofA global scale in investment management, including an approximately 50% ownership in BlackRock, which has US$1.4 trillion in assets under management. Bank of America has $589 billion in assets under management.

Merrill Lynch also adds strengths in global debt underwriting, global equities and global merger and acquisition advice.

“Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders,” Bank of America chairman and CEO Ken Lewis said. “Together, our companies are more valuable because of the synergies in our businesses.”

“Merrill Lynch is a great global franchise and I look forward to working with Ken Lewis and our senior management teams to create what will be the leading financial institution in the world with the combination of these two firms,” said John Thain, chairman and CEO of Merrill Lynch.

CRAs place ratings for Bank of America under review

Credit rating agencies are reacting cautiously to the shotgun marriage of Bank of America Corp. and Merrill Lynch & Co Inc., noting that short-term risks to such a deal are high.

DBRS has today placed all ratings of Bank of America “Under Review with Negative Implications”, following news that it has agreed to acquire Merrill Lynch in an all-stock transaction valued at approximately $50 billion. “While this acquisition may yield substantial strategic benefits to Bank of America over the long term, it also involves significant risks,” DBRS notes.

Bank of America’s status reflects the view of DBRS that the risks inherent in the Merrill acquisition make a downgrade possible over the near term, given the pressures from the disruptions in the financial markets. “By acquiring Merrill, Bank of America is paying a premium over book value to gain a valuable franchise. Merrill’s Global Wealth Management, Investment Banking, Rates and Currencies, Commodities, and Global Markets Financing and Services are all performing well, with several business lines producing record revenues. However, the company will not likely be able to realize the full benefits of this transaction until financial markets stabilize,” it says, adding that DBRS does not expect this recovery to occur in the short term.

“At the same time, Merrill’s significant exposure to asset-backed securities, collateralized debt obligations, CVAs to hedges with financial guarantors, residential real estate and leveraged finance entails the risk of potentially large further losses. In addition, Merrill may also face material costs of legal disputes and may be subject to regulatory inquiries that could impact its business,” it notes.

Standard & Poor’s Ratings Services also said that it lowered its long-term counterparty credit rating on Bank of America, and the long-term ratings on BofA’s holding company and its bank subsidiaries were placed on CreditWatch with negative implications. At the same time, Standard & Poor’s also placed its ratings on Merrill Lynch on CreditWatch with developing implications.

“The downgrade of BofA and the placement of the ratings on CreditWatch with negative implications reflect the risks of acquiring Merrill Lynch in the present turbulent market environment,” said Standard & Poor’s credit analyst John Bartko.

S&P notes that this latest deal takes place on the heels of BofA’s recent acquisition of troubled mortgage lender Countrywide Financial Corp. “In our view, the purchase of Merrill will place further pressure on BofA’s capital, already strained by the Countrywide acquisition,” it says.

“Merrill will introduce more residential housing risk to BofA, notably in the form of its sizable holdings of collateralized debt obligations backed by subprime residential mortgage backed securities, at a time when the U.S. mortgage market continues to deteriorate. We cannot rule out the possibility of future writedowns,” S&P adds.

@page_break@“While BofA has a history of successfully integrating bold acquisitions, the purchase of Merrill carries integration risk, particularly since it comes during a period of severe market turmoil. BofA has never integrated an investment bank the size of Merrill. Events of the past year demonstrate the high business risk of the securities industry. Moreover, management of a substantially bigger and global franchise could present challenges unknown to BofA,” it says.

“On the positive side, Merrill Lynch maintains strong positions in investment banking, retail brokerage, and wealth management. The successful combination of these strong business lines with BofA’s second-tier investment banking and asset management positions would create a top-tier commercial and investment-banking group with significant growth potential when the financial industry emerges from its current downturn,” S&P suggests.

“Nonetheless, the near- to intermediate-term risks of capital strain and residual mortgage risk outweigh the potential long-term benefits,” it concludes.

IE