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Bank of America Buys Countrywide for $4 Billion
Mergers & Acquisitions |
2008/01/11 09:20
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Bank of America, the largest U.S. retail bank, said Friday that it will buy stumbling mortgage giant Countrywide Financial (CFC) in a $4 billion stock deal that catapults Bank of America from the No. 5 mortgage lender to No. 1.
Rumors of an acquisition have been growing since August, when Bank of America invested $2 billion for a 16% stake in Countrywide, which was reeling from losses on subprime loans and the evaporation of interest among investors for mortgage-backed bonds.
Angelo Mozilo, 69, founder and CEO of Countrywide - now a symbol of the excesses in the mortgage market that fueled the real estate bubble - is expected to step down when the deal closes this fall.
"I want him to stay until the deal gets done," said Ken Lewis, chairman and CEO of Bank of America. "Then I would guess he would want to go have some fun. I will talk to him next week about his personal desires."
Mozilo, who is under investigation by the Securities and Exchange Commission for his sales of Countrywide stock, was not immediately available for comment. In a statement he said, "We believe this is the right decision for our shareholders, customers and employees."
Countrywide, based in Calabasas, Calif., laid off 20% of its employees last year as the real estate market sank into the worst downturn since World War II.
The company, however, is still the largest mortgage servicing company, with a portfolio of 9 million loans worth $1.5 trillion. Countrywide also has a sales force of 15,000 people, 1,000 field offices and some of the best technology in the industry.
Customers of both companies will see few changes before 2009, when they begin to combine operations. Lewis said Bank of America, based in Charlotte, may start offering credit cards and other products to Countrywide customers, and may put Countrywide loan officers in Bank of America branches.
Under terms of the deal, Countrywide shareholders will exchange each of their shares for 0.1822 shares of Bank of America, worth about $7.20 based on Thursday's closing price and about 7.5% below Countrywide's closing price.
But it's still "a gift" for Countrywide shareholders, says Richard Bove, a senior bank analyst at Punk Ziegel. "They will own stock in one of the nation's best banks."
The buyout comes less than five months after Bank of America invested $2 billion in Countrywide and just weeks after Lewis vowed that making a deal in the mortgage industry would require him "to eat about seven years of my words."
It also puts Lewis, an aggressive dealmaker, in the position of a market savior. By buying Countrywide, he's keeping the industry and regulators from the messy task of figuring out who would take responsibility for collecting payments from the millions of U.S. home loans serviced by the lender.
"There's still plenty of risk involved," says Bart Narter, senior analyst at Celent, a financial research and consulting firm. "He's brave to do it. But I think that it's very likely down the road to be profitable, maybe not immediately, but long-term."
The deal is expected to be neutral to Bank of America earnings per share in 2008 and lift earnings in 2009, excluding buyout and restructuring costs.
Bank of America expects $670 million in after-tax cost savings in the transaction, or 11% of the expense base of the two companies' mortgage operations.
Countrywide shares hit record lows in recent days on persistent rumors that a bankruptcy was imminent, a condition brought on by the widespread spike in mortgage defaults and foreclosures, especially in subprime loans - those made to borrowers with weak credit.
Countrywide shares plunged more than 14%, or $1.08, to $6.66 in morning trading after soaring $2.63, or 51.4%, to close at $7.75 Thursday on reports of a possible deal. Bank of America shares fell 1.2%, or 45 cents, to $38.85.
Lewis' bank has $1.5 trillion in assets and is the nation's largest bank by market capitalization.
"Their balance sheet can take a shock much better than Countrywide," said CreditSights senior analyst David Hendler. "When you take the shocks at Countrywide, they have a big, busting consequence that's negative."
While Lewis downplayed the prospect of a major deal last month, it fits with a pattern of building Bank of America through acquisition. In the past few years, Lewis has expanded the bank's retail operation with multibillion purchases of FleetBoston Financial, bolted on a credit card business by adding MBNA and grabbed a wealth-management business in U.S. Trust Co.
The result of all the dealmaking is a widely diversified financial services company that does business with nearly one out of every two U.S. households.
In the past year, Bank of America has boosted its market share of prime mortgages, those offered to borrowers with a solid credit history, and was the top retail mortgage originator in the U.S. the first nine months of 2007.
"We are aware of the issues within the housing and mortgage industries," Lewis said. "The transaction reflects those challenges. Mortgages will continue to be an important relationship product, and we now will have an opportunity to better serve our customers and to enhance future profitability."
In Countrywide, Lewis gets the "best, total mortgage-banking company in the U.S. by far," Hendler said. Countrywide's sophisticated back office is a valuable asset that makes Bank of America a much bigger competitor with Wells Fargo, Washington Mutual and others, he said. In 2007, Countrywide had $408 billion in mortgage originations and has a servicing portfolio of about $1.5 trillion with 9 million loans.
"The technology platform, the people who run it, the hedging, the facilities, the mortgage servicing rights, the origination platform, you know, they are all state of the art," Hendler said.
While there are some regulator hurdles to close the deal, they are hardly insurmountable. The buyout would require approval from the Federal Reserve, and possibly other agencies, but analysts believe regulators are more concerned about a Countrywide collapse than industry consolidation.
A Countrywide failure would be a huge blow to government-sponsored mortgage finance companies Fannie Mae and Freddie Mac, which have been major buyers of Countrywide's loans.
Federal law also bars banks from acquisitions that would increase market share above 10% of U.S. deposits, a limit Bank of America is nearing. Experts disagree about whether deposits held by Countrywide's federally regulated savings bank would count toward that limit, and Hendler said Bank of America could also get a waiver from regulators.
Banking industry experts also say Bank of America could easily lower the total amount of money held in deposits by lowering interest rates and shedding deposits. |
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