Bank of America (NYSE:BAC) is reportedly looking to dissolve Merrill Lynch as a separate legal entity and merge it with the parent company by the end of this year.  So why is this a big deal, you ask? The move is after all, just a matter of some paperwork that transfers all the assets and liabilities of Merrill Lynch from a separately maintained entity to the parent bank holding company. More so given the fact that Bank of America will retain the Merrill name for all the operations that are to be merged.
The reason why we say Bank of America’s decision to go ahead with this assimilation a good four years after it acquired the brokerage giant is a great piece of news because it shows that Bank of America no longer sees Merrill Lynch’s operations as a source of concern. That’s a marked change from the way it was viewed for quite a long time after the acquisition with billions in losses related to Merrill’s mortgage-backed securities being aggravated by the string of lawsuits that followed. Quite simply put, Bank of America is now confident that besides a few pending litigation, Merrill Lynch has cleaned house for good and is playing its part in creating value for the country’s second largest bank.
We stick to our $15.60 price estimate for Bank of America’s stock, which is slightly ahead of its current market price.
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The Proposed Merger Entails Some Pretty Straightforward Changes…
By folding Merrill Lynch’s operations into the parent company, Bank of America will essentially assume all the long-term debts and obligations on Merrill Lynch’s balance sheet. According to the bank’s SEC filing for the second quarter of the year, Merrill Lynch has a total long-term debt of $61.8 billion and the various other Merrill Lynch subsidiaries have an additional $18.7 billion in long-term debt. Once the merger is completed, the $61.8 billion in liabilities will transfer to the parent company – Bank of America Corporation – taking its total long-term debt figure to $200 billion. It must be remembered here that the total liability for the bank does not change, as the total size of long-term debt will clearly remain constant at $262.5 billion.
The only rationale for maintaining an entity separately is if its liabilities are well above the worth of its assets, as it limits the exposure of the parent company to the value of assets in the subsidiary. This is the reason why Bank of America continues to maintain Countrywide as a separate entity as its $5 billion in assets are hardly enough to make good for tens of billions in liabilities that its operations have accumulated since the recession.
Will It Have An Overall Positive Impact On Total Value?
There will be quite a few positive impacts of the merger on Bank of America’s business, with the most pertinent one being a reduction in overall costs from a less complex operating structure. This will take Bank of America one step closer towards achieving the cost reduction target it set for itself as a part of Project New BAC. The impact of an improvement in margins for Merrill Lynch’s cornerstone wealth management business on Bank of America’s share value can be understood by making changes to the chart above.
The merger will also help ease some regulatory pressure that Bank of America has been under since its acquisition of Merrill Lynch and Countrywide at the peak of the economic downturn, as its complex structure was seen as a major deterrent to its implementation of an effective ‘living will.’  A ‘living will’ has been mandated by regulators for all systemically important banks to have a plan ready in place in case a bank falls into another economic crisis in the future.
Besides this, a small added benefit from the merger is that Bank of America will not need to maintain a separate book of accounts for Merrill Lynch, which should reduce a reporting headache for the bank.Notes:
- BofA Will Dissolve Merrill Lynch Unit While Keeping Name, Bloomberg, Aug 16 2013 [↩] [↩]