Friday, July 01, 2005

Deal Flow: BofA Enters Credit Card Business

That's exactly what happened Thursday as the major league bank took out the credit card giant.

Arguably, the move is aimed at thwarting BofA competitor Wachovia.

Wachovia was in talks with BofA a couple of weeks ago before the deal fell apart.

Bad move.

Now BofA is part of a billion dollar industry that MBNA is a strong player in and Wachovia is not.

It's that simple.

Money talks.

On Wall Street, nothing is as vociferous.

MBNA earned $2.7 billion on revenue of $12.3 billion last year.

BofA's chief was certainly ecstatic about the $35 billion dollar deal:

"For years, I have been impressed with the sales capabilities of MBNA," Bank of America Chairman and CEO Ken Lewis told industry analysts after the deal was announced. "I see them as a selling machine. ... We have the franchises and they have marketing savvy."

The deal will bring Bank of America's credit-card business to a level on par with major financial services firms Citigroup Corp. and JP Morgan & Chase Co.

The bank's chief financial officer, Marc Oken, went further, saying taking on MBNA will bring increased stability to Bank of America's balance sheet.

The takeover will result in 6,000 jobs cuts, across both companies, Lewis said. Bank of America expects the job cuts to help it achieve overall cost savings of $850 million, which would be fully realized in 2007, and anticipates a restructuring charge of $1.25 billion.

Savings also will be achieved through the elimination of overlapping technology, vendor leverage and marketing expenses.

Only time will tell us whether or not Bank of America overpaid -- rumor already has it they did.

As Bruce Wasserstein writes in his seminal 1998 book Big Deal, "The ultimate decision in evaluating a deal is whether or not to pay the price."

Of course, you need hindsight to figure out whether or not the deal was worth it.

What makes mergers & acquistions so fascinating is how closely it resembles game theory.

Take more of the pie for yourself; watch the other guy starve.

Who wins when resources are misdistributed?

Strangely enough, sometimes, the losers are the winners.

For just like an auction, the losers come out on top if the winning buyer/bidder has overpaid.

With regards to mergers, perchance potential synergies and strategic considerations don't coalesce and Buyer A is no winner at all.

That's what I call the calculus of M&A.

Price has nothing to do wth the deal -- to borrow from Wasserstein again, it always comes down to "operating issues."

If any of you remember the Snapple buyout by Quaker in the 90s, you'll know what I mean.

Quaker paid 1.3 million for the beverage darling only to sell Snapple soonthereafter for 300 million after the 2 companies couldn't harmonize their distribution channels.

Again, operating issues.

Whatever the case may be, there is no doubt that BofA is on a buying binge.

As execs once envisioned for shareholders, BofA has emerged as the nation's first coast-to-coast bank, swallowing northeastern banking force FleetBoston in 2004 for almost $50 billion.

BofA is the third-largest bank in the US by assets behind Citigroup and JPMorgan with more than 5,800 locations covering some 30 states.

It is always good to see management deliver on promises.

But let's wait and see what happens before we start singing our paean to synergy.

Update: On 7/2/05, Barrons reported that it thinks the buyout will spur further consolidation among banks and crdit card issuers. They're apparently convinced Capital One will be the next one to go. Maybe Wachovia has a second chance?

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