Bank of America (BAC) is rumored to sell First Republic Bank, a private bank it inherited from Merrill Lynch & Co (MER).
In September 2008, BofA announced the acquisition of MER for $50 billion all-stock transaction. This acquisition was completed in January 2009. Shareholders of Merrill Lynch received 0.8595 shares of BofA common stock for each common share of MER held. The acquisition is supposed to have strengthened BofA’s capacity in debt and equity underwriting, sales and trading, and merger and acquisition advice. At the same time, the acquisition gave BofA a stake of almost 50% in BlackRock Inc, the investment management firm with operations in the US, Europe and Asia Pacific. The merger was expected to result in $7 billion in pre-tax expense savings by 2012 through a mixture of job cuts, savings on technology and vendor and marketing expenses. However, the deal has been difficult for BofA to digest as MER has been raking record losses in the last few quarters. In 2007, MER reported net losses in excess of $8.6 billion. This was followed by losses in excess of $11.7 billion for the first three quarters in 2009. Notwithstanding this, MER raked in $15.84 billion losses in the fourth quarter of 2009. In fact MER’s fourth quarter losses were $500 million more than a prior estimate of $15.31 billion from its new owner BofA. This was a coup de grace for BofA as BofA reported full-year 2008 profit of $4.01 billion compared with net income of $14.98 billion a year earlier.
Shareholders have punished BofA for MER acquisition as the company’s stock price dropped from $35 in end September 2008 to $5.16 as of February 25, 2009. In a single day, the news of MER’s fourth quarter losses led to 3% drop in BofA’s stock price to $4.59. MER’s record losses and BofA’s declining performance has led to erosion of BofA’s capital. In order to stop the erosion in capital BofA is reported to be considering the sale of First Republic Bank.
First Republic Bank was acquired by MER for $1.8 billion in September 2007 to bolster the securities firm's wealth-management and banking operations. Founded in 1985, First Republic’s foot print stretches from Los Angeles to Boston. At the time of the San Francisco bank's purchase by Merrill, First Republic had $10 billion of deposits. Merrill operated First Republic as a standalone unit with its own brand name and management. BofA already has a wealth-management business, U.S. Trust, which was acquired from Charles Schwab Corp. As a result, the future of First Republic Bank has been hanging in the balance soon after BofA acquired MER. However, MER continued loss making trend coupled with BofA’s declining performance forced them to raise capital through asset sales. It is but natural for the company to sell redundant assets such as First Republic Bank.
The move to sell First Republic Bank will be well received by First Republic customers.
