Big mergers tend to grab big headlines but frequently don’t generate big returns for investors.
With three months down and, it hopes, three to go until Bank of America Corp. closes its $35 billion acquisition of credit card giant MBNA Corp., shareholders can’t be blamed for wondering whether the deal ever will boost earnings enough to justify the hefty purchase price.
On June 30, Bank of America, the country’s largest bank by deposits, agreed to pay a roughly 30 percent premium to MBNA’s closing price to become the largest U.S. credit provider.
But since the acquisition was announced, the bank’s stock price is down nearly 10 percent; it also is off 10 percent since the start of the year. Bank of America isn’t alone among bank stocks: The Keefe Bruyette bank sector index, a collection of large and small financials, is 8 percent lower this year.
Lately, though, questions about the MBNA deal have dovetailed with more pressing concerns about Bank of America’s ability to manage its bond trading and loan portfolio.
In addition, the financial giant’s size has prevented it from raising its standard savings and checking account rates.
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As a result of last year’s $47 billion purchase of FleetBoston Financial Corp., Bank of America’s total deposits have grown close to the 10 percent national limit imposed by regulators. To avoid going over the limit, the bank has kept interest rates lower than competitors, prompting some customers to take their business elsewhere.
Indeed, the MBNA deal came as the bank’s second-quarter profit fell 8 percent from the first three months of the year.
Last month, Chief Financial Officer Marc Oken left his job after Wall Street panned the company for overstating its ability to weather the mismatch between rising short-term interest rates and low long-term rates. Bank officials acknowledged that Oken, 58, who said he retired to be with his family, could have better communicated the bank’s financial outlook.
But vocal Bank of America critic and investor Thomas Brown, chief executive of Second Curve Capital, a New York hedge fund that specializes in financial stocks, claims Oken was pushed out because the company overpaid for MBNA.
Brown argues that Oken, with bank Chairman and CEO Kenneth Lewis, impulsively bought MBNA when they got word crosstown Charlotte rival Wachovia Corp. was poised to cut a deal. Not to be outgunned, Bank of America quickly paid up.
“Three days of due diligence wasn’t sufficient on MBNA,” said Brown, who also runs the Web site Bankstocks.com. “That was just plain reckless.”
Bank of America spokesman Robert Stickler countered that the company had long done business with MBNA, was well aware it was looking to be sold and was familiar with quickly making big decisions. The deal, Stickler said, allows Bank of America to use its 5,900 branches in 29 states to sell MBNA cardholders, among the lowest-risk groups in the industry, such new products as mortgages and financial management.
Craig Woker, associate research director at Morningstar Inc., said doubts about the MBNA deal may have more to do with concerns about growth in the credit card industry.
Woker, who likes the deal, said the plethora of plastic available to consumers has diluted the high profile MBNA enjoyed as it grew quickly in the 1990s. Additionally, homeowners these days are far more apt to access equity loans rather than high-interest credit cards.
High gas prices are also a concern, since consumers might cut back on using credit cards.
It’s no wonder Bank of America is trading at a slightly lower price to estimated earnings multiple for 2006 than its chief rivals, Citigroup, JPMorgan Chase and Wachovia.
Meredith Whitney, bank analyst for CIBC World Markets, said Bank of America is trading at just under 10 times its 2006 earnings estimate, while its main competitors are at roughly 11 times forward earnings.
Whitney disagrees that the MBNA deal was impulsive. She said Oken didn’t do a good job explaining that “Bank of America’s problem has been that they have tons of liquidity, and nothing to do with it.”
With MBNA, she said, Bank of America can borrow at low rates from its depositors and lend at much higher ones to its credit card holders.
“It’s a very simple message,” she said.
Woker agrees, adding that while the bank probably overpaid for FleetBoston, the MBNA deal makes good sense.
“In a consolidating industry, this was a great way to get new customers in order to sell them new products,” he said.
A consensus of Wall Street analysts that cover Bank of America rates the stock a buy, reports Thomson Financial.
That may be, but, for the moment, investors aren’t biting.
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