Bank of America (BAC) Still Paying for Merrill Buyout via Lawsuits

Bank of America (BAC) has to pay a $2.43B settlement for a class action lawsuit over its buyout of Merrill Lynch. Consider also that BofA is still facing potential a civil fraud lawsuit from the state of New York. A brief history of this acquisition reveals that it cost $20B initially, then forced BofA to incur a $27.6B loss and incur a $20B bailout liability.

I feel safe in saying that the acquisition of Merrill Lynch will never really pay off for Bank of America. Whatever specious synergy BofA may have gained from combining back office functions is minuscule in the face of $70B+ worth of financial statement degradation. I do not want to hear any claims of referral benefits from Merrill’s wealth management and investment banking units to BofA’s commercial bank. BofA has never fully integrated its U.S. Trust wealth management arm with the bank’s existing wealth management unit, and watching BofA compete against itself in that sector used to amuse me. Merrill’s culture is even less compatible with BofA, and it’s still separately branded just like U.S. Trust. Imagine an investor walking into a BofA branch and asking for a referral to a wealth manager, and the teller says something like “Sure, we’ve got a bunch of divisions that all do the exact same thing.” Clueless.

BofA earned almost $4.2B in 2012, on declining gross revenue. This settlement will hurt, no doubt. What should hurt even more is that BAC’s P/E is a ridiculously high 47.88 as of today’s close. That denominator is going to drop once this settlement is paid out. The broad economy’s long-term P/E is 14, so if BofA were trading in line with the economy’s permanent prospects it would be around $3.50/share. It traded at a little over $5/share back in December 2011, so maybe the market had BAC figured out back then. I have no idea where this share price will go. I also have no idea why any portfolio manager would buy the stock of a bailed-out bank with a history of bad acquisitions, cultural clashes, and unfavorable litigation results.

Full disclosure: No position in BAC at this time.

About Anthony Alfidi 128 Articles

Affiliation: Alfidi Capital LLC

Anthony Alfidi is the Founder and CEO of Alfidi Capital. His firm publishes free investment research with honesty and humor.

Mr. Alfidi holds a Bachelor's degree in human resource management from the University of Notre Dame (cum laude) and an MBA in finance from the University of San Francisco. He is a life member of Beta Gamma Sigma, the academic honor society for business majors. He has been a private investor since the 1990s.

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