Professional Documents
Culture Documents
Kevin Rodriguez
April 27, 2004
FIN 5154
Table of Contents
Table of Contents............................................................................................................................ 2
Introduction..................................................................................................................................... 3
Why Merge?.................................................................................................................................... 3
FleetBoston ................................................................................................................................. 3
Bank of America ......................................................................................................................... 4
The New Bank of America ............................................................................................................. 5
Effects on the Banking Industry ..................................................................................................... 7
Conclusion ...................................................................................................................................... 8
Exhibit 1: FleetBoston ROE Analysis, 2001 10.......................................................................... 9
Exhibit 2: FleetBoston ROE Analysis, 2002 11........................................................................ 10
Exhibit 3: FleetBoston ROE Analysis, 2003 12........................................................................ 11
Exhibit 4: Bank of America ROE Analysis, 2001 13 ............................................................... 12
Exhibit 5: Bank of America ROE Analysis, 2002 4 ................................................................. 13
Exhibit 6: Bank of America ROE Analysis, 2003 14 ............................................................... 14
Exhibit 7: Bank of America and FleetBoston Geographic Presence 15 ................................... 15
Exhibit 8: The New Bank of America: Statistical Highlights 1,16 ........................................... 16
Exhibit 9: New Bank of America Pro Forma ROE Analysis, 2004......................................... 17
Exhibit 10: New Bank of America Pro Forma ROE Analysis, 2005....................................... 18
Exhibit 11: New Bank of America ROE Sensitivity Analysis ................................................ 19
Exhibit 12: Bank of America and FleetBoston Revenue Mix 15.............................................. 20
Cited References ........................................................................................................................... 21
2
Introduction
In October 2003, Bank of America (Charlotte, North Carolina) and FleetBoston (Boston,
Massachusetts) announced their intentions to merge. The federal government and bank
shareholders approved the merger in early 2004. The two banks officially became one on April
1st, 2004. Bank of America’s acquisition of FleetBoston cost the company $47 billion in stock, a
roughly 40% premium over FleetBoston’s market share price at the time the merger was
announced.
This paper examines the impetus behind the merger from both Bank of America and
FleetBoston’s perspectives. It then explores how the newly merged bank will benefit from the
merger and what type of financial performance might be expected based on the prior financial
performance of each bank. Finally, the paper closes with a brief discussion on how the Bank of
Why Merge?
FleetBoston
Shortly after the merger was announced, FleetBoston CEO Charles Gifford stated that his
company had been searching for a merge partner for over a year. "It became increasingly clear
that scale is a tremendous advantage, if properly managed," he said. "We did not have the scale
of other banks." 1 More likely, however, is that FleetBoston’s poor financial performance in
previous quarters led management to that decision. Many in the banking industry believed
another round of consolidation would coincide with economic recovery and FleetBoston’s poor
performance indicated the inability to compete in a further consolidated market. These trends
3
FleetBoston’s financial woes began in 2001, sparked by extensive credit losses (up 80%
over 2000) in Latin and South America. The bank’s ROE dropped from 22% in 2000 to 5% in
2001 and the credit loss reserve jumped 35%. Similar poor performance carried into 2002 as
ROE barely eclipsed 7%. Continued losses in Argentina, the energy sector and the airline
industry (primarily due to United’s bankruptcy) hampered income.3 In both 2001 and 2002 the
bank was plagued by high loan loss provision-to-earning asset ratios. FleetBoston made
significant financial improvements in 2003, but by that time they were already well on the road
to acquisition. Complete ROE analyses for 2001-2003 are available in Exhibits 1-3.
Bank of America
While FleetBoston struggled in the recession following the bubble collapse of 2000,
commercial loans, residential mortgages and credit card revenue.4 Despite lower net interest
margins than FleetBoston, Bank of America did not encounter severe credit problems and thus
earnings were not impacted by charge-offs to the extent that FleetBoston was affected. Complete
The bank began seeking acquisition targets that could increase its geographic expanse
and enhance its already strong retail banking business. In 2002, Bank of America operated
primarily in the southeast, south, west coast, and had limited operations in the southwest and
midwest. Notably absent was a presence in the wealthy northeast market, a market in which
FleetBoston had a significant presence. (See Exhibit 7 for a map of each bank’s geographic
4
The New Bank of America
The merged banks will retain the name Bank of America. Current Bank of America CEO
Kenneth Lewis will remain in that post, while former FleetBoston CEO Charles Gifford will
become chairman of the board of directors. The enlarged bank boasts some impressive statistics,
shown in Exhibit 8. Though while statistics are impressive, they do not necessarily translate into
better performance, something investors in both banks are eager to see. Bank of America
investors in particular are concerned that the 40%+ premium paid for FleetBoston may have been
too high. The bank will need to prove to more than just shareholders that the acquisition was a
smart move. "This deal seems to be all about size and scope," said a Merrill Lynch analyst,
"although size and scope are not good justifications for the 43 percent acquisition premium that
In order to wring efficiencies out of the newly acquired bank, Bank of America’s first
announcement was the cutting of 12,500 jobs within the company. "They feel like they have
something to prove to Wall Street to convince investors like ourselves that they didn'
t pay too
much for Fleet," said Larry Puglia, who runs a T. Rowe Price Blue Chip Growth fund and owns
Bank of America shares. "It is an unfortunate aspect of entering into large mergers like this that
there will be some job losses." 6 The bank will incur restructuring charges of $800 million but
expects to realize cost savings of $250 million in 2004 and $1.1 billion in 2005 1. Cost savings
will primarily come from the wealth management, credit cards, principal investing and marketing
In order to provide a glimpse of what future financial performance might be, the 2003
ROE analyses for Bank of America and FleetBoston have been combined into pro forma 2004
and 2005 analyses, incorporating the restructuring costs and estimated savings mentioned above.
5
These analyses are located in Exhibits 9-10. It is interesting to note that the new bank’s
combined ROE even through 2005 cannot match the performance of Bank of America in 2003.
This further assumes that the cost savings laid out can be achieved. A sensitivity analysis is
located in Exhibit 11 that reflects ROE changes based upon varying levels of cost savings. Even
at savings 150% of those estimated, the performance cannot match 2003 levels. Based on the
data presented in Exhibits 9-11, one must assume that Bank of America management believes
synergies between the combined operations will provide additional growth opportunities that will
improve performance in the future. For the short-term, however, Bank of America’s
performance will likely be hampered by merger costs and by absorbing a less profitable company
than itself.
The acquisition of FleetBoston not only achieves the stated goals of geographic
expansion, but Bank of America hopes to increase its lead in the retail banking segment and
small business lending. Additionally, the company hopes it can add to its market share in areas
of mortgage banking, credit card lending, commercial lending and asset management.7 A
comparison of each bank’s previous revenue mix and the new bank’s revenue mix is located in
Exhibit 12. The company has stated that it intends to expand into the Philadelphia and eastern
Bank of America faces significant operational risks associated with a merger of this
simultaneously. These include the integration issues inherent in a major merger, concurrent
business unit and management team realignments, the resolution of existing regulatory issues
and strengthening of risk management systems, and the need to achieve substantial cost savings."
Additionally, FleetBoston was in a more risky credit position than Bank of America at the time
6
of the merger, thus securities analysts have downgraded some of BOA’s debt ratings until the
In order to secure the acquisition of FleetBoston, it was widely reported that Bank of
America had to outbid several rival banks thus driving up the cost of the purchase. BankOne,
Citigroup, Wachovia and Wells Fargo were considered potential buyers. “Fleet'
s scarcity value,
being one of the few large independent banks left in the Northeast, drove up its price. But that'
s
that a round of consolidations within the financial sector may have begun. "With the economy
recovering, credit quality on the mend, and net interest margins about to stabilize, the stage
appears set for the next round of bank M&A activity; the BofA/Fleet deal may have broken the
logjam," stated Merrill Lynch analysts.8 Just three months later, J.P. Morgan Chase announced it
would purchase BankOne (Charlotte Business Journal). Several potential targets in the industry
remain, including KeyCorp, National City, Comerica, SunTrust, PNC Financial and U.S.
Bancorp.3
Given the consolidation that has and may still occur, many question whether or not the
trend of mega-mergers is good for the banking industry. Smaller community banks, in
particular, are fearful of their future as consolidation continues and they attempt to compete with
multi-billion dollar banks down the street. One concern they have is that large banks will
petition to have a portion of the Riegle-Neal act repealed. This portion of the act prohibits bank
mergers when such a merger would create a bank controlling more than 10% of the deposits in
the U.S. Bank of America CEO Kenneth Lewis has stated that the company has no intention of
requesting a repeal. The bank is, however, permitted to grow internally past the 10% threshold.2
7
From a regulatory standpoint, is the current regulatory system sufficient to handle such
large banks? "These mergers have enormous public policy implications. First, the trillion dollar
banks that will result from these megamergers will be too big to regulate effectively," said Ken
Guenther, President of the Independent Community of Bankers. "Secondly, these banks will be
There are also concerns as to how these large banks affect banking customers. As more
and more banks are consolidated, competition in the market dwindles and this can have an
adverse affect on deposit rates, banking fees, loan rates and customer service. Despite merging
banks’ claims that increased customer convenience and scope of services will ultimately benefit
customers, there has been little evidence to support this. Nonetheless, the Federal Reserve Board
has continued to approve megamergers and there are few signs that this trend will reverse
anytime soon.9
Conclusion
geographic and market coverage. However, whether or not this acquisition will be profitable is
unclear. Short-term merger activities will hurt Bank of America’s performance, but long-term
growth may result. The merger appears to have started a round of consolidation in the financial
services industry as evidenced by J.P. Morgan Chase’s swift move to snap up BankOne. The
trend towards mega-consolidation has so far not been thwarted by the Federal Reserve Board.
8
Exhibits
9
Exhibit 2: FleetBoston ROE Analysis, 2002 11
10
Exhibit 3: FleetBoston ROE Analysis, 2003 12
11
Exhibit 4: Bank of America ROE Analysis, 2001 13
12
Exhibit 5: Bank of America ROE Analysis, 2002 4
13
Exhibit 6: Bank of America ROE Analysis, 2003 14
14
Exhibit 7: Bank of America and FleetBoston Geographic Presence 15
15
Exhibit 8: The New Bank of America: Statistical Highlights 1,16
16
Exhibit 9: New Bank of America Pro Forma ROE Analysis, 2004
- This analysis uses the 2003 performance of both banks as a baseline. The 2003 balance
sheets and income statements have been combined and adjusted as follows1:
o Expensed $400 million in estimated restructuring charges (1/2 of total
restructuring charge)
o Applied estimated cost savings of $250 million
17
Exhibit 10: New Bank of America Pro Forma ROE Analysis, 2005
- This analysis uses the 2003 performance of both banks as a baseline. The 2003 balance
sheets and income statements have been combined and adjusted as follows1:
o Expensed $400 million in estimated restructuring charges (1/2 of total
restructuring charge)
o Applied estimated cost savings of $1.1 billion
18
Exhibit 11: New Bank of America ROE Sensitivity Analysis
20.7
150% 18.78
20.29
125%
savings
18.68 2005
19.87 BofA 2003 2004
100% 18.59 ROE
19.46
75% 18.49
19.04
50% 18.4
17 18 19 20 21 22 23
ROE
19
Exhibit 12: Bank of America and FleetBoston Revenue Mix 15
20
Cited References
1
Byrne, R. (2003). Bank of America to Acquire Fleet for $47 Billion. Retrieved April 3, 2004
from http://www.thestreet.com/markets/rebeccabyrne/10122344.html.
2
Tannenbaum, F. (2003). Deal Fits Both Banks’ Needs. Charlotte Business Journal. Retrieved
April 12, 2004 from http://charlotte.bizjournals.com/charlotte/stories/2003/10/27/daily7.html.
3
La Monica, P. (2003). Bank Earnings: Ugly But Not a Disaster. Retrieved March 22, 2004
from http://money.cnn.com/2003/01/10/pf/investing/q_fleet/.
4
Bank of America 2002 Annual Report.
5
AFP. (2003). Bank of America to Absorb FleetBoston, Creating No. 2 bank. Retrieved April
21, 2004 from http://www.taipeitimes.com/News/worldbiz/archives/2003/10/29/2003073837.
6
Reuters. (2004). Bank of America to Cut 12,500 Jobs. The Economic Times. Retrieved April
21, 2004 from http://economictimes.indiatimes.com/articleshow/602560.cms.
7
SNL Financial. (2004). Fitch Cuts Bank of America Senior Debt Ratings, Ups Fleet'
s Long,
Short, Individual Ratings. Retrieved April 22, 2004 from
http://www.snl.com/Interactive/IR/story.asp?IID=100266&NID=1641633.
8
Hannaford, S. (2003). Big Bank Merger. Oligopoly Watch. Retrieved April 22, 2004 from
http://www.oligopolywatch.com/2003/10/27.html.
9
ICBA. (2004). ICBA Expresses Concerns About Large Bank Mergers. Retrieved April 12,
2004 http://www.icba.org/news_views/news011504a.html.
10
FleetBoston 10K Report for Year Ending December 31, 2001.
11
FleetBoston 10K Report for Year Ending December 31, 2002.
12
FleetBoston 10K Report for Year Ending December 31, 2003.
13
Bank of America 2001 Annual Report.
14
Bank of America 2003 Annual Report.
15
Presentation Slides from October 27, 2003 Merger Announcement.
16
American City Business Journals. (2003). Merger Fills Void in BofA’s Footprint. Charlotte
Business Journal. Retrieved April 14, 2004 from
http://charlotte.bizjournals.com/charlotte/stories/2003/10/27/daily5.html?page=1.
21