The Changing Landscape

As part of Bank of America’s planned purchase of Merrill Lynch, BofA Chairman and CEO Ken Lewis has said that Merrill Lynch Chairman and CEO John Thain will have a major role in the combined companies, which announced their plan to merge in September in a $50 billion all-stock transaction.

Thain will become president of global banking, securities and wealth management in the combined company with responsibilities for corporate and investment banking and most of global wealth and investment management at BofA, which will be merged with similar functions at Merrill Lynch.

The possibility that BofA, or a similar institution, might purchase Merrill (founded in 1907) was predicted by industry expert Chip Roame in June as part of Research magazine’s 30th-anniversary issue.

“My guess is that Merrill Lynch is no longer a stand-alone entity. It’s been bought by a bank,” shared Roame, when asked about his predictions for the next 30 years. “I would find it highly unlikely that Merrill Lynch as a company, including the trading business and the investment bank, could be bought by any organization other than a bank.”

That prediction came true less than four months after it was made by the head of Tiburon Strategic Advisors. In early August, equity analyst Richard Bove pointed out some of his deep concerns about Merrill Lynch: “The company’s pronouncements of late do not seem to meet with its actions … any of the firm’s statements concerning its balance sheet over the past year have simply not [been] matched with subsequent actions by the company.”

Overall, Merrill has had after-tax losses of $14 billion related to almost $52 billion in write-downs and credit-related losses, according to an early September issue of the Financial Times. These 18-month losses amount to about 25 percent of the $56 billion in profits made in Merrill’s 36 years as a public company, according to newspaper.

In late July, Merrill sold some $31 billion in collateralized-debt obligations to Lone Star at a discount price of 23 cents on the dollar, taking the CDOs off of Mother Merrill’s balance sheet.

As shares of Lehman Brothers and other firms collapsed in mid-2008, it appears that Merrill Lynch opted to sell assets and then the firm rather than face the wrath of the markets, Bove and others said.

BofA seemed poised to help.

“It should be noted that in two decades of making acquisitions, Ken Lewis, CEO of Bank of America, has not made many mistakes, if any,” wrote Bove in July. “He has been tasked with the need to make just about anything his predecessor bought profitable, and he did it. Betting against Lewis’ skills on a financial acquisition has always been wrong.”

“Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders,” says Lewis. “Together, our companies are more valuable because of the synergies in our businesses.”

“Merrill Lynch is a great global franchise, and I look forward to working with Ken Lewis and our senior management teams to create what will be the leading financial institution in the world with the combination of these two firms,” says Thain.

Merrill Lynch has more than 16,500 financial advisor s worldwide, giving Bank of America the largest brokerage in the world with more than 20,000 advisors and $2.5 trillion in client assets.

The combination brings global scale in investment management to the bank, including some 50 percent ownership in BlackRock, which has $1.4 trillion in assets under management. Bank of America has $589 billion in assets under management and reported a third-quarter profit of $1.18 billion, or 15 cents per share, down from $3.7 billion, or 82 cents per share, a year ago.

The transaction is expected to close in the first quarter of 2009.

In other news, Morgan Stanley, home to 8,350 advisors, has formed a “strategic alliance” with Mitsubishi UFJ Financial Group of Japan, and — along with Goldman Sachs — it has become a bank-holding company, ending its days as an investment bank.

“Based on consultation with the Department of Justice regarding the applications of Goldman Sachs and Morgan Stanley to become bank holding companies, the Federal Reserve Board announced on Monday [September 22] that the transactions may be consummated immediately without the application of the five-day antitrust waiting period,” according to a Fed statement.

Mitsubishi is investing $9 billion in equity in Morgan Stanley for a 21 percent stake in the firm. MUFG is Japan’s largest financial group and the world’s second-largest bank holding company with $1.1 trillion in bank deposits and some $1.8 trillion in assets.

Mitsubishi Tokyo Financial Group and UFJ Holding of Osaka merged their operations starting in October 2005. The combined entity owns UnionBanCal, the parent firm of Union Bank of California and HighMark Funds.

“This strategic alliance offers a powerful opportunity to accelerate Morgan Stanley’s transition as a bank holding company,” says John Mack, Morgan’s chairman and CEO. “MUFG’s investment is also a strong endorsement of Morgan Stanley’s world-class global franchise and future potential.”

Morgan Stanley is now positioned to be the sole remaining independent wirehouse broker-dealer.

It recently reported income from continuing operations for the third quarter ended August 31 of $1.425 billion, or $1.32 per diluted share, compared with $1.474 billion, or $1.38 per diluted share, in the third quarter of last year. Net revenues were $8.0 billion, 1 percent above last year’s third quarter.

Equity sales and trading net revenues of $2.7 billion included record results in prime brokerage and strong results in the proprietary trading, derivatives and cash businesses.

Morgan Stanley’s financial advisors reported total client assets of $707 billion, a decline of $27 billion, or 4 percent, from last year’s third quarter as net new assets were more than offset by asset depreciation. Client assets in fee-based accounts were $186 billion, a 12 percent decrease from a year ago, and represent 26 percent of total client assets.