BofA has agreement to buy Merrill

On a day that saw Wall Street chieftains and U.S. officials scrambling to shore up the financial system, Bank of America Corp. on Sunday swooped in to buy brokerage and investment banking giant Merrill Lynch, only hours after officially dropping out of the race to buy battered Lehman Brothers.

The Charlotte bank reached an agreement to buy Merrill for about $44 billion, a person familiar with the situation said.

With that, Bank of America lands the nation's biggest fleet of stock brokers and bulks up an investment bank that has never been among Wall Street's elite. But such a deal could bring a challenging integration and more exposure to the nation's mortgage crisis.

The deal is the latest bold purchase by Bank of America chief executive Ken Lewis, who has created a banking behemoth that dominates retail banking, credit cards and mortgages. With Merrill Lynch, he plants his company more firmly in the nation's banking center of New York and can reach more customers through a retail brokerage force that can sell investments and banking products.

“I think Lewis has long lusted after Merrill Lynch,” said analyst Nancy Bush of NAB Research in New Jersey. As for Merrill Lynch CEO John Thain, “it was the best deal he could cut for shareholders,” she said, as worries about Lehman's health turned to the next likely victim.

The takeover continues Bank of America's long history of opportunistically buying distressed companies, from banks suffering in the savings and loan crisis in the 1980s to struggling mortgage lender Countrywide Financial this year, said Miami-based banking consultant Ken Thomas.

The transaction also further distance the bank from Charlotte rival Wachovia and returns the bank to the financial forefront lately claimed by New York-based JPMorgan Chase, Thomas said. “This lets investors know they are still a player and still in the game,” he said.

In a deal worth about $29 per Merrill Lynch share, Lewis is paying a premium over Friday's closing price of $17.05, but much less than the $70 height the stock has fallen from over the past year. The Treasury Department and the Federal Reserve are pushing Bank of America to buy Merrill, seen as the shakiest investment bank after Lehman, according to reports.

Lewis has long expressed misgivings about buying an investment bank because of the risk and the potential for culture clashes.

But Merrill is alluring because of its well-known brand and huge brokerage force that can reap fees from wealthy customers and distribute stocks and bonds generated by investment banking operations. Over the years, rumors have linked Bank of America with Merrill Lynch. Lewis and Thain reportedly began their talks Saturday.

Merrill comes with a lot of baggage. The 94-year-old investment firm marked by its bull logo, fell into trouble last fall, when its subprime investments dragged the firm into the red.

In 2007, Merrill lost $8.6 billion and ousted its chief executive, Stan O'Neal. Ironically, one of O'Neal's missteps was soliciting a takeover offer from Wachovia without permission from his board.

In December, Goldman Sachs alum Thain took over as CEO, looking to right the ship. He has slashed exposure to commercial real estate, raised capital on the stock market, cut jobs, and sold off much of Merrill's problematic subprime mortgage investments.

But Merrill is still losing money, with a loss of $4.6 billion in the second quarter. It is scheduled to report third-quarter earnings on Oct. 16, and has already said it expects billions in write-downs related to selling off toxic investment vehicles.

Merrill, which has 60,000, employees, is perhaps best known for its wealth management division. Its global wealth management earned $738 million in the second quarter, compared to a loss of $8.2 billion in global markets and investment banking. And while Thain has cut 4,200 jobs, mostly in investment banking and support services, he has added to his brokerage force.

Merrill had 16,690 advisers at the end of the second quarter, the most of any firm. In the tier behind it are Citigroup (14,983 financial advisors) and Wachovia (14,632). Bank of America is much smaller, with 4,500 client managers and financial advisers in its premier banking and investments division.

James Early, an analyst at The Motley Fool, called Merrill a “less surprising” merger partner than Lehman, because of Merrill's recent management shakeup and its relative strength.

“Bear Stearns was a deathbed company, Lehman was an almost deathbed company, Merrill is just a sick company,” said Early. “And that is probably an easier sell to Bank of America shareholders.”

The Merrill talks followed a whip-saw few days that saw Bank of America go from the top contender to buy Lehman to a bystander. A personal familiar with the situation said the bank abandoned its bid Sunday because the government wouldn't agree to backstop Lehman's bad real estate holdings. British bank Barclays reportedly dropped out for similar reasons.