Bank of America to acquire Countrywide Financial!

Bank of America is purchasing Countrywide Financial for $4 billion, effectively doubling down on its previous investment in the troubled firm and catapulting the buyer into the top spot among mortgage lenders and loan servicers in the US. The stock-swap deal will put an end to the independence of the troubled California lender. Terms call for Countrywide stockholders to receive 0.1822 of a share of Bank of America stock in exchange for each share they own. At yesterday's close, that values Countrywide at $7.16 a share - lower than the $7.75 closing price after news leaked of a possible deal. Countrywide's shares fell 13%, dropping $1.04 early today, to $6.71.

While Countrywide's market value is a fraction of its peak level of $45 billion last year, Bank of America's bigger expense would be writedowns from declining value of the lender's $209 billion loan portfolio, said Sean Egan, managing director of Egan-Jones Rating Co. in Philadelphia. A 5% writedown on the portfolio would be more than $10 billion, roughly half of the bank's 2006 profit of $21 billion. And keep in mind that it is more likely to be much much MUCH worse than $10B than to be any better than that. In my mind $10B is an optimistic best case scenario.

Sources: WSJ, MarketWatch

ETA:

The Good
* Merger would create by far the largest mortgage lender and servicer in the US - with approximately 12.8 million customers and 23% market share
* BofA would gain the opportunity to cross-sell bank products to an estimated 9 million Countrywide mortgage customers
* BofA would gain Countrywide's retail bank (thrift deposit) customers
* BofA would acquire leading - while proprietary - loan origination and loan servicing platforms

The Bad
* Managing through a potential culture clash between Countrywide's aggressive mortgage operations and Bank of America's professional retail banking environment may be a significant challenge
* With the prospect of this merger, BofA will test regulators anxiety levels associated with the 10% deposit rule by exploiting a little known, never used loophole
* BofA's balance sheet status and capitalization requirement will come under further scrutiny, which started when it acquired LaSalle bank
* Identification and elimination of redundant lending and banking systems is complex, and will be a multi-year process

The Ugly
With a recession looming, capital markets becoming more nervous, an overspent consumer, rising energy rates and a collapsing real estate market, this acquisition is a very bold move by the BofA board. In fact, the timing of this acquisition seems on the surface little more than a bailout strategy to protect its earlier $2 billion investment in Countrywide.