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Mr. Ken Lewis, Chief Executive of Bank of America (BOA), was harshly questioned regarding BOA's acquisition of Merrill Lynch. This was driven by an earnings release on January 16, 2009 indicating Bank of America had massive losses for the 4th quarter of2008 due to the Merrill Lynch acquisition. Bank of America 's stockfell to $7.18, its lowest level in 17 years following the release of the earnings announcement. Complicating the matter was that the market capitalization of Bank of America, including Merrill Lynch, was just $45 billion, and Bank of American had offered $50 billion to acquire Merrill.
These events led both insiders and outsiders to question the acquisition. What due diligence should have been completed and were there were relevant accounting policies and valuation issues of concern? In this case, students are placed in a decision-making role to provide a financial analysis considering different options and assessing the benefits and detriments of the acquisition. It provides students an opportunity to apply acquisition principles in a real-life setting.
Keywords: due diligence, mergers and acquisitions, financial statement analysis
INTRODUCTION
On January 16, 2009, in an earnings release, Bank of America revealed massive losses for the 4th quarter of 2008 at Merrill Lynch. This action was the impetus for an emergency government bailout of $20 billion to keep the bank solvent. The large loss for the 4th quarter at Merrill Lynch was due to an operating loss of $21.5 billion primarily in its sales and trading operation. Bank of American also disclosed it tried to abandon the acquisition with Merrill Lynch when they discovered the extent of the trading losses in December. However, they were required to complete the acquisition by the U.S. government. Upon the release of the earnings announcement and the Merrill situation, Bank of America's stock fell to $7.18, its lowest level in 17 years. Surprisingly, Bank of America's capitalization, including Merrill Lynch, fell dramatically after the acquisition. It dropped from $108 billion prior to the acquisition to about $45 billion. This was dramatic given they had offered about $50 billion for Merrill four months earlier.
The events leading up to this problem are open for interpretation, but even Bank of America seemed to have overestimated the value of Merrill Lynch. Both insiders...