NEW YORK (AFP) — Bank of America announced Monday it was buying Merrill Lynch for 50 billion dollars in stock, scooping up the Wall Street icon battered by the housing and credit crisis.
While giving a lifeline to a troubled Wall Street giant, the deal creates the world's largest financial services company, according to the companies.
The announcement came at the close of a tumultuous weekend that saw Wall Street rival Lehman Brothers seek bankruptcy protection, setting off fears of falling dominoes in the global financial system.
Merrill Lynch was seeking a lifeline with its shares tumbling some 78 percent over the past year on fears of snowballing losses from the subprime real estate meltdown and global credit squeeze.
The deal offers Merrill around 29 dollars a share, compared with Friday's closing price of 17.05 dollars.
"This is great news because it gives Merrill shareholders a 12-dollar a share premium and takes out what would have been the next firm to fail," said Peter Cohan of Peter Cohan & Associates.
"I am not sure how Bank of America will make the deal pay off, but now attention focuses on the next domino to fall."
Merrill Lynch shares held steady with a gain of 0.06 percent at 17.06 dollars on the news despite a rout in global stock markets. Bank of America shares slid 21 percent to 26.55 dollars.
"We wonder if Bank of America has appropriately priced Merrill's 80-plus billion dollars of risky asset exposures, particularly considering its relatively thin capital base," said Joe Morford at RBC Capital Markets.
Standard & Poor's cut its credit rating for Bank of America to AA-minus from AA and kept the rating on watch for further possible downgrades.
The actions "reflect the risks of acquiring Merrill Lynch in the present turbulent market environment," said Standard & Poor's credit analyst John Bartko.
"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," S&P said.
The agency added that Merrill "will introduce more residential housing risk to BofA, notably in the form of its sizable holdings of collateralized debt obligations ... We cannot rule out the possibility of future writedowns."
Bank of America, which earlier this year bought troubled mortgage firm Countrywide Financial, said the acquisition of Merrill creates a financial powerhouse.
"Acquiring one of the premier wealth management, capital markets and advisory companies is a great opportunity for our shareholders," Bank of America chairman and chief executive Ken Lewis said in a statement.
"Together, our companies are more valuable because of the synergies in our businesses."
The news comes six months after a rescue of Bear Stearns, another storied Wall Street group that neared collapse until last-minute deal brokered by US officials gave it to JPMorgan Chase.
John Thain, chairman and CEO of Merrill Lynch, said he looked forward to working with Bank of America to create "what will be the leading financial institution in the world."
Under the terms of the transaction, Bank of America would exchange 0.8595 of its shares for each Merrill Lynch common share.
The transaction has been approved by directors of both companies and is subject to shareholder votes and standard regulatory approvals. It is expected to be finalized in the first quarter of 2009.
Following the acquisition of Merrill Lynch, Bank of America would have the largest brokerage in the world with more than 20,000 advisers and 2.5 trillion dollars in client assets.
It will also give the bank approximately 50 percent ownership in financial firm BlackRock, which has 1.4 trillion dollars in assets under its management.
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