Background and research problem:

“The first rule of life is also the first rule of business: Adapt or die”. – Alan M. Weber

Mergers and acquisitions and takeover have been one of the most discussed and the most prominent and occurring event in today’s world and mainly in the banking sector. There has been various famous takeovers, mergers and acquisitions in the past like JPMorgan Chase’s acquisition of Bear Stearns, Bank of America takeover Merrill Lynch to name a few.

There have been numerous takeovers and mergers both at international level as well as in the domestic level in the banking sector all over the world. One of the principal objectives behind the mergers and acquisitions in the banking sector is to reap the benefits of economies of scale. Besides these various acquisition and mergers, it is a question of interest not only academically, but also practically interesting to know whether such takeovers and mergers were worthwhile or not mainly in the banking sector.

Aim and objectives:

The main purpose of the research is to analyze and find out whether it was the right choice/ worthwhile to takeover Merrill Lynch by Bank of America.

In order to find out whether Bank of America have made the right choice in taking over Merrill Lynch, I am going to focus mainly on two factors, the first factor is the financial analysis of both BoA and Merrill Lynch. The other factor I am going to look at is the motives for the acquisition and whether these were achieved, if they were achieved the we can say BoA has made the right choice in acquiring Merrill Lynch. There have been numerous studies done to find out the motives behind an M&A, but none states that the motive is to increase shareholder wealth.

Few of the main areas the focus is going to be are as listed below:

What was the reason / the problem faced by Merrill Lynch to take this drastic step.

The terms and conditions of the takeover.

Financial Analysis of both the companies before and after the acquisition.

Find out whether it was the right choice to takeover Merrill lynch and the reasons for the takeover.

To find out the value enhancement to Bank of America due to the takeover.

Literature review:

Over the past decade, there has been a immense growth in the mergers and acquisitions taking place in almost all parts of the world and mainly in the finance and banking sectors. The banking industry has experienced an unprecedented level of mergers and acquisitions among large financial institutions have taken place at record levels. Studies related to mergers and acquisitions have been conducted by various imminent researchers of both banking and finance sectors for decades. In addition, since financial performance of acquisition in the banking sector has a great impact on the economic growth, this has attracted adequate interest from policy-makers, managers, shareholders and depositors.

The study of mergers and acquisitions focuses on understanding what motivates managers to engage in this type of activity and the impact that mergers and acquisitions have on shareholder returns. The growth of a company is also depended on mergers and acquisition to a certain extend. Managers undergo mergers and acquisitions to expand their empire in size, (Mueller, 1969) in sales and in assets (Berle and Means, 1932), (Schipper and Thompson, 1983). Another reason why managers undergo mergers and acquisition is to have various potential market gains, for improving its technologies, overcoming its technological barriers, and also to expand in the market and also to diversify their existing strengths. Managers are also pursuing efficiency improvements which can be gained from bidding firms and synergy of targets due to economies of scale and use of excess capacity. Another reason why managers may undergo mergers and acquisitions is to lower the cost of capital and improve shareholder returns. Managers have the assumption that due to co-insurance effect, acquisitions can reduce the probability of default (Lewellen, 1971) and thus and increasing the debt capacity of the combined firm and reducing bankruptcy costs. Managers can reduce the cost of capital through interest tax shields by increasing debt capacity and add value to the firm. Levy and Sarnat (1970) support this managerial motivation.

Mergers and acquisitions have been occurring in the United States for decades, from the 19th century and moving to the 21st century, so this is not a new thing in the United States.. However, many poorly understood and managed acquisitions result in disappointing performance, and up to 50 percent are regarded as generally unsuccessful (Business Week, 1985; Louis, 1982). Moreover, according to Mercer Management Consulting (Cited in Smith & Hershman, 1997), in the 1990s the success rate of corporate acquisitions are barely 50 percent, and in the 1980s, 57 percent of acquisition deals failed. However, mergers and acquisitions that are poorly managed have led to negative performance and almost 5o percent are unsuccessful (Business Week, 1985; Louis, 1982). Till date, U.S has considered mergers and acquisition as one of the most important tool to improve and increase the growth of the firm. By using sophisticated and systematic methods, there can be a proper understanding of post and pre acquisition performance. However, Sirower (1997) stated that, “despite a decade of research, empirically based academic literature can offer managers no clear understanding of how to maximize the probability of success in acquisition programs” (p. 13).

The graph below indicates the amount of mergers and acquisitions which took place between the years 1992 and 2005

Some of the major mergers and acquisition that took place in the United States is as follows:

In the year 1992, Bank America (currently Bank of America) acquired Security Pacific National Bank (SPNB) for a price of around 7 billion dollars.