“La Citadelle, Quebec City”


The photograph was taken during my third month studying at McGill University, Canada. Back then, I was exhausted from pulling all nighter almost everyday to keep up with the abundant tasks the program required (it is a Master of Management in Finance). My mind was in chaos, my body exhausted and the lack of sleep really drove my emotional control. Knowing I have to had a break, I decided to go to Quebec City after the final exams are over, before the beginning of another course. It was just me, my camera, and a suitcase.

The weather was cold, and strong wind was blowing my face as I stand on the top of the hill. But the sky was just so gorgeous that I could not leave it before it turned black. The first day’s sunset was not very bright, as the cloud was covering the sky. This photograph was taken on the second day, the sun’s reflection on Chateau Frontenac was just right, the cloud’s orange color was a warmth in the middle of the cold evening.

I spend 3 days in the Old Town area f the city, touring around museum and historic sites in the day, and watching the sunset on the evenings. It was one of the best trip I have taken so far, where I could think about life and reflect on my priorities. I have this picture set as the background of my laptop now, as it makes me more relaxed before working on financial modeling and studying.



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Things You Must Do in Quebec City for Solo Traveler

In the last two months, I have been working and studying excessively at McGill University. I have been in campus past midnight several times in a week and eating a lot of Korean foods located at a building nearby. When Labor Day comes, I planned a trip to Quebec City to treat myself and detached from all the stress coming from university life and finding a job. I am traveling alone, without any expectation of the city, to explore this beautiful place all by myself.

PSX_20170901_143453Chateau Frontenca from the Citadel during the day

Currently, I am writing this post on Dufferin Terrace, sitting in a chair outside the Starbuck café in Chateau Frontenac. It is 9.39 in the morning and tourist starts coming to the terrace. There is a lady singing classical music in front of the chateau, I see people taking photographs of each other, Indian and Chinese tourist go on and off their bus.

PSX_20170901_143300Quebec Cityscape taken from Observatoire de la Capitale

From my three days trip, these are the highlight and most enjoyable moment to me:

  1. Hike to Montmorency Falls

I took the fifteen minutes trip from the city by Uber, costing me CAD$20 for a one-way trip. The admission to the waterfall is less than CAD$5, but you might have a difficulty in going back to the city. Luckily, there is an Uber dropping a passenger in the falls, so I could find my way back easily. Once you arrived at the terminal building, there is a bridge to get closer to the waterfall where you could find the stairs to the top of the hill. Mind you that there is a lot of staircase and it is quite challenging to get to the top (but is possible if you take it slowly). There is several “checkpoint” on the way to the top where you could take photograph and rest. After reaching the top of the stairs, I walk further to the suspension bridge above the waterfall to take some pictures.

PSX_20170902_144254Montmorency Falls

PSX_20170902_144339 Montmorency Falls

Why is it enjoyable? If you are lucky, you will see a rainbow at the foot of the fall. And as you get closer to the waterfall, feel the water splashing your face. The view from the second checkpoint is the best, in my opinion.


  1. Sunrise and Sunset at the Citadelle

I am staying at Hotel Cap Diamant, a nice place in the city and is very close to the Citadelle, so I could wake up at 5.30 in the morning and watch the sunrise by 5.50 am at the top of Citadelle facing Chateau Frontenac. There is an entry gate if you walk across Dufferin Terrace, next to US consulate building, leading to the hill (do not mistaken it with the stairs at the end of Dufferin Terrace, which leads to Abraham’s plain).

PSX_20170901_235720Sunrise from the Citadel

PSX_20170903_072735Sunrise from the Citadel

PSX_20170903_072931Sunrise from the Citadel

PSX_20170902_000143Quebec City at Night

When I watched the sunrise this morning, only a couple was there beside me, which make the place a great spot for having time alone. I found the sunset to be very gorgeous; the backdrop of the city lights mixed with the orange sky is just perfect. And if you have the time, wait for one more hour after the sunset to see the cityscape at night, which is equally amazing. I like to spend my time listening to classical music while taking the photographs (bring a tripod if you are a professional). The wind is strong up on the hill, so make sure you are appropriately dressed like an astronaut.


  1. Touring Around the City on Foot

The old town area is not very big and it is possible to see 70% of the historical site and museum in one day, which I did on the first day. I visited Rue de Petit Chaplain three times in different time (early morning, noon, evening) despite not buying anything there. Make sure you visit Notre-Dame Basilica de Quebec, which has amazing architecture inside and outside. Also visit Morrin Library, which was a prison and then converted into college. There is a guided tour (CAD$9-15) for 45 minutes every hour, which is worth your time. For the sake of enjoyment alone, I walked on Dufferin Terrace over 10 times in my three days stay, just because it felt amazing to have wind blowing to your face and listen to the street musician.

PSX_20170902_144159Notre-Dame Basilica

PSX_20170902_161131Terrace Dufferin

PSX_20170903_073048 Rue de Petit Champlain in the morning

  1. Sunset from Levis

One and a half hour before sunset, take a ferry across the Saint Lawrence River (CAD$3.55) and wait for the sunset. The ferry is available every 30 minutes in the evening and took only 15 minutes to get across. In the ferry terminal at Levis, there is a Tim Hortons store, where I pick up a big cup of hot tea to drink while waiting for the sunset. Beside the ferry terminal, there is a small park with very convenient chairs and beach-chairs where you could see the city over the river.

PSX_20170902_191047Sunset from across Saint Lawrence River

PSX_20170902_233944The City at Night

Why is it enjoyable? I spent my time waiting by reading a book and listening to classical music (a recurring theme, isn’t it?) while waiting for the sky to turn orange, then dark blue. I just love the experience of seeing the sky change its color and the city lights turned on one-by-one.


  1. Listening to Street Performers (Especially Claude Berger)

This activity is actually not planned in my trip, but I found it to be the most enjoyable experience during the three days trip, seriously. I was passing the street in front of Chateau Frontenac on Saturday night after having the sunset from Levis, to found a small crowd around a street musician named Claude Berger. He is very good at playing saxophone and singing old-time songs, which made you feel the city is becoming more romantic as time goes by. There is a love in the air. I sat for more than an hour and listen to his performance, as the crowd grew larger and larger.

The next thing you know, people are dancing on the street and the environment gets lively pretty fast. You may want to come early and reserve a seat in front of the Manoir Hotel, where he usually performs. Some of his performances that I love are “My Way” (his last song), “What a Wonderful World”, and “Stand by Me”.


PSX_20170902_000256Terrace Dufferin at Night

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Taipei One Day Trip


We arrived last night in Taipei, on a transit flight to New York. Last night we slept at 1 am, but this morning we managed to woke up at 6 am to have a day trip in the city. We have breakfast at Cuto Hotel, where we stayed at (given by eva air), 40 minutes away from the city by car. Around 8 am we departed from our hotel and rode a taxi to the city. It is rush hour time, so there was quite a traffic on the highway and in the city , but we managed to arrive at Taipei 101 slightly before 9 am.


The observatory on Taipei 101 is open at 9 am, we were the first guest today so we could enjoy all the view without so many crowd. We spent about an hour on the deck, there was a small theatre as well at the 91st floor showing the building process of Taipei 101. The view is great, but the lighting could be better in the evening rather than in the morning.


Afterwards, my mother and sister wanted to go to Line store. Yes, it is the social messaging app that is fanous for it’s iconic characters. It is located nearby, about 10 minutes walk away. The store is located on a luxury brand complex, including several brands such as Hermés and Chanel. While my mother and sister were shopping, I walked around to capture Taipei 101 from the ground. There were also few people doing weddding photoshoot in the complex.

It was 12 am when we were finished, so we rushed back to the shopping mall at Taipei 101. Initially we want to eat at Din Tai Fung, but it was lunch time and the queue was very long, so we decided to take away a burger and eat it at hotel.

We took a taxi from the mall with an old driver who does not speak English at all, mind you that most people in Taipei does not speak english or speak very little of it. Our hotel is quite far from the city and although our driver had a gps, he could not use it very well. We got lost and miss an exit on the highway, before eventually I helped him with the navigation using body languange and very basic Mandarin. When we arrived at our hotel, we have to paid NTD 1700 ($60). He asked us to pay only NTD 1500, but we just could not, we feel sorry for him.

It was 2.15 pm. At the hotel we had our lunch and took a shower before taking a bus to airport at 4 pm. We have to paid an extra of NTD 1500 ($55) for the late check out. I received my Financial Risk Manager Level 2 exam result, which I passed! The shuttle to airport was free, arranged by eva air. Taipei airport is very clean and has many branded goods store, we take a look around but shoppped nothing. Our flight departed at 6.20 pm and we begin our 14 hours flight to New York.

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A Lesson from Seneca on Life

Recently I have been reading the writing’s of Seneca, a popular stoic written during the Roman era. I have read the writings several time before but reading it again and again has always give me new perspective, that is the reason I recommend people to read the same book every two years, because our experience during those period may provide us with different way of thinking.

One message that is clear throughout Seneca’s writing is that most human waste their time on unnecessary preoccupation and activities. It’s not that we are given a short time, but rather we waste those time unwisely. Let’s take a very common example in our daily life, when we are faced with a project that we deemed as difficult and time consuming, it is our nature to delay doing the project. We often make planning on when we will do it, but when the time comes, we defer doing the project to tomorrow. In my own experience recently, I often distract myself with social media and reading email instead of studying for an exam. Such activities are counterproductive and hinder our progress to finish the main task at hand.

Now let’s look at the broader application to life in general. Sometimes I look at people like a drunken sailor, who keeps on rowing their boat (life) without first setting a direction on where they want to go. They may say things like,”wherever I arrive, that’s where I am destined to go”. No wonder that some of us are living a life in the same way we have been living in the past several years. It is important to have a goal to be achieved and a timetable for its completion, without it, our life is like a boat floating on the ocean. Very few times, the wind is favourable and bring us to a beautiful island. Most of the time, however, we are just floating on the water until our time is up.

Seneca also teach about having a balanced life, in social setting and in private life. A man  busy with daily occupation may be so absorbed to his job, as if it worth his whole life. When retirement comes, he find it meaningless to live since he is not useful to anyone. But it couldn’t be further from the truth, in fact he may find enjoyment in his solitude, a luxury he may not be able to obtained in his work. True, he may not be as functional to public service as he was, but public service is not limited to a formal position. Teaching a children kindness, manner, and other social work also counts as public service.

In short, his writing teaches me to:

  • Have a plan for life, what I want to achieve and when
  • Make a plan for achieving those goals, and do what it takes to achieve them without procrastinating when a task is due
  • Have a balanced life in both social and private setting. We never know when our time is up, so it is best to enjoy every day as if it is our last, while working as if we will live forever.

“It is not that we have so little time but that we lose so much. … The life we receive is not short but we make it so; we are not ill provided but use what we have wastefully.”
― Seneca, On the Shortness of Life


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Bank of America – Merrill Lynch Acquisition During Global Financial Crisis

Download the PDF to see the figures: bank-of-america-merrill-lynch-acquisition

Part I: Case Summary

“On September 15, 2008, Merrill Lynch & Co., Inc. and Bank of America Corporation announced a strategic business combination in which a subsidiary of Bank of America will merge with and into Merrill Lynch. If the merger is completed, holders of Merrill Lynch common stock will have a right to receive 0.8595 of a share of Bank of America common stock for each share of Merrill Lynch common stock held immediately prior to the merger. In connection with the merger, Bank of America expects to issue approximately 1.710 billion shares of common stock and 359,100 shares of preferred stock” –Bank of America Letter to Shareholder


The 2008 Global Financial Crisis has taken many casualties in the financial market worldwide, including the failure of Global Systemically Important Banks (G-SIBs). The first financial institution to collapse at the crisis was Countrywide Financial Corp., American largest mortgage lender that later acquired by Bank of America in January 2008. Two months later, Bear Stearns, which also has a great amount of Mortgage Backed Securities (MBS), was rescued from bankruptcy by JP Morgan Chase for a price of $10/share. Seven days before, its share was still trading at $65/share. On September 7th, two Government Sponsored Entities (GSE), FNMA and FHLMC were privatized by the US Department of Treasury due to the severe loss that would lead to bankruptcy and shook the financial market to a more catastrophic situation (Havemann, 2009).

There was fear in the market and financial institutions with large exposure to Asset Backed Securities are very fragile. After series of acquisition made in the financial system in the first semester of 2008, the market then shorted Lehman Brothers and Merrill Lynch, which both have great MBS exposure. On September 14th, Bank of America agreed to acquire Merrill Lynch for $ 50 billion while Lehman Brothers declared bankruptcy the next day. The crisis worsens for the next few months, leading to the failure of other GSIBs such as American International Group (AIG), Washington Mutual, and Wachovia Corp (Havemann, 20009).

In this case study, we are going to highlight the valuation and acquisition process of Merrill Lynch by Bank of America in the midst of 2008 Global Financial Crisis. This case study is not intended to determine whether the action taken was right or wrong, but rather intended to highlight alternative options using data available at the time.


Bank of America

Bank of America is the world’s largest bank based in Delaware and operating under U.S. federal law. It is headquartered in Charlotte, North Carolina. It serves individual customers, small and middle enterprises, and large corporations in 175 countries. Bank of America business lines includes banking, investing, asset management, and risk management products and services. In United States alone, BOA had 59 million customers served through 6000 retail banking offices, 18000 ATMs, and online banking. As of June 30, 2008 it had total consolidated assets of $ 1.7 trillion, deposits of $ 785 million, and stockholders’ equity of $ 163 billion (Bank of America, 2008).

Bank of America business and financial performance had been great from 2003 up to 2006, interest income grew at 19% CAGR, non-interest income grew at 27.6% CAGR, and net income doubled during the period. During the same period loans and leases distributed grew at 22.3% CAGR, while deposits grew at 18.3%. The good business performance was supported by the low interest rate policy of Federal Reserve between 2001-2004, where the interest rate was cut from 6% to the low of 0.75% in December 2002 (figure 1.1). Federal Reserve was determined to stimulate growth of the economy post Internet bubble period, in turn encouraging Americans to lend more. There was a long period where interest rate stays, until it was increased gradually in June 2004 to June 2007 (Bank of America, 2004; 2005; 2006).

The increase in interest rate leads to increase in floating rate of mortgage as well; at the time many Americans are not in a good financial position to service their mortgage, especially the sub-prime segment and the Adjustable Rate Mortgages (ARMs). The lax lending standard employed previously results in high non-performing loan and default of home borrowers, decreasing the home price nationwide. The high non-performing loan and foreclosure of houses impacted all saving and loan, banks, and financial institution with exposure to mortgage, including investment bank that securitize the mortgages into MBS (Havemann, 2009).

Figure 1.1 United States Federal Funds Rate January 2000 to September 2008

Apart from the issues with housing and mortgage industry, in January 2008, Bank of America acquired Countrywide Financial for $ 2.5 billion (Bank of America, 2007), Countrywide was the largest mortgage lender in US. It has $ 408 billion mortgage originations in 2007 and servicing portfolio of $ 1.5 trillion with 9 million loans. BoA thinks that Countrywide acquisition would affirm their position as the nation’s premier lender to consumers. Due to the weakness in housing market and increasing trend of NPL, in 2007 Bank of America net income decrease 29% YoY due to the rise in provision combined with decrease in interest and non-interest income (Bank of America, 2008). In the first half of 2008, net income continue to worsen, decreasing 58% compared to the first half of 2007 due to the tripling provision for credit losses and decrease in non-interest income (figure 1.2). Meanwhile, non-performing assets quadrupled from 0.32% to 1.13% between first half of 2007 and 2008 (figure 1.3) (Bank of America, 2009).

The deterioration of Bank of America business was also reflected in the stock price traded in NYSE, after rising from $ 40/share to $ 55/share between January 2004 to late 2006, BoA stock price tumbled to its low of $ 18/share. It then fluctuated between $ 25-40/share in September 2008 (figure 1.4). Breakdown of Bank of America income statement and balance sheet are available on the appendix.

Figure 1.2 Bank of America Income Statement and Financial Ratio 2003 – mid 2008 (Bank of America, 2008)

Figure 1.3 Bank of America Balance Sheet and Assets Quality 2003 – mid 2008 (Bank of America, 2008)

Figure 1.4 Bank of America Stock Price January 2004 to September 2008


Merrill Lynch

Merrill Lynch was founded in 1914 and became listed on Jun 1971. It is one of the leading capital markets, advisory, and wealth management companies in the world. Merrill Lynch has branches across 40 countries and total client assets of $ 1.5 trillion at September 2008, it also has 45% voting interest and half of the economic interest of BlackRock, Inc., world’s largest publicly traded asset management with $1.3 trillion in assets under management at the time. Merrill Lynch products and services include advisory to corporations, governments, institutions and individuals worldwide, apart from its role as investment bank, global trader, and underwriter of securities and derivatives (Bank of America, 2008).

Merrill Lynch had been actively underwriting derivatives, including CDO, CDO squared, and CDO cube that during the course of financial crisis turned to be worth significantly less than the par value. Between 2006 and 2007, Merrill was the lead underwriter on 136 CDOs worth $93 billion, which it retained partly and lead to billions of dollar losses. For example, in the middle of 2008 Merrill Lynch sold a group of CDOs valued at $ 30.6 billion to Lone Star Funds for $ 1.7 billion in cash and $ 5.1 billion in loan (Keoun and Harper, 2008).

Merrill Lynch business and performance had been great from 2003 to 2006, revenue grew at 36.3% CAGR, while net income grew at 24.4% CAGR (figure2.1) (Merrill Lynch & Co., 2003; 2004; 2005; 2006). Securitization business had been growing at a very rapid pace and contributed significantly Merrill’s balance sheet, at least 13% of its assets at the end of 2006 (Appendix 2.2). In 2007 Merrill Lynch incurred $ 8 billion loss in net income due to the significant increase in interest expense (provision for losses), although in the first half of the year it still recorded a profit of $ 4.17 billion. The condition deteriorated in the first half of 2008, when total revenues dropped 57% YoY. Stockholders’ equity, in turn, decrease 17.6% in the first half of 2008 compared to first half of 2007 (Bank of America, 2008). Considering Merrill Lynch exposure to MBS and other derivatives, significant decline in their value could easily wiped out Merrill’s equity (look at appendix 2.2 for details). Breakdown of Merrill Lynch income statement and balance sheet are available on the appendix.

Figure 2.1 Merrill Lynch Income Statement and Balance Sheet 2003 – mid 2008 (Bank of America, 2008)

Deterioration of Merrill Lynch business performance and market’s fear of worsening crisis drove Merrill’s stock down from $ 50/share in January 2008 to $ 15-25/share in September 2008 (figure 2.2).

Figure 2.2 Merrill Lynch Stock Price January 2008 to September 2008


BoA-ML Acquisition

In September 2008 US stock market has been declining 37% from one year earlier, there were speculation on the impending collapse of financial institutions such as Lehman Brothers. Lehman Brothers announced $ 3.9 billion net loss for its third quarter of 2008 on September 10th, 2008. Merrill Lynch stock declined 36% in only one week. On Saturday the same week, John Thain, Chairman and CEO of Merrill Lynch, contacted Ken Lewis, Chairman and CEO of Bank of America. Mr. Thain proposed for Bank of America to acquire 9.9% equity stake in Merrill Lynch and to provide credit facility. However, Mr. Lewis said that he was not interested in acquiring minority stake in Merrill Lynch, but is interested in business combination with Merrill Lynch. He beliefs that the combination of both companies would complement each other business line, in retail brokerage and wealth management, also in investment banking and investment management (Bank of America, 2008).

In light of the imminent bankruptcy of Lehman Brothers and deterioration in financial market, Bank of America and Merrill Lynch began arranging meetings among management and advisors to discuss the pro and cons of such transactions and did a due diligence on the business, financial, operational, and legal aspect of the transaction. Representatives of Merrill Lynch also met with representatives from BoA to discuss the valuation and pricing shares of Merrill’s common stock, Merrill Lynch indicated that they were seeking a significant premium to the last Friday’s closing price of $ 17.05/share, also at the appropriate book value multiple. The discussion and negotiation over the weekend results in the transaction price of $ 29.00/share, equal to exchange ratio of 0.8595 BoA common stock and 70.1% premium to September 12th, 2008 closing price (Bank of America, 2008).

Merrill Lynch benefits from the merger through BoA business that complements Merrill Lynch global wealth management, markets, and investment banking businesses, and stronger capital, funding capabilities, and liquidity of BoA. More importantly, Merrill Lynch would avoid downgrade from rating agency that potentially leads to bankruptcy. Meanwhile BoA benefits from the customer bases, business products and skills of Merrill Lynch services to enhance the capabilities of its business line. The Acquisition was also expected to save $ 7 billion each year on a pre-tax basis due to overlapping business and infrastructure. The acquisition itself may cost up to $ 3 billion pre-tax (Bank of America, 2008).

Merrill Lynch, Pierce, Fenner & Smith Incorporated, Merrill Lynch financial advisor valued Merrill Lynch stock at range of $ 21.93 – $ 29.25, while FPK and J.C. Flowers, Bank of America financial advisor valued Merrill Lynch stock at range of $ 20.96 – $ 31.77 (figure 3.1). FPK and J.C. Flowers also valued Merrill’s potential synergy with BoA, leading to a higher valuation of $ 32.7 – $ 45.96 (Bank of America, 2008).

Figure 3.1 Merrill Lynch and Bank of America Valuation

Figure 3.2 Pro-Forma Combined Income Statement of ML and BoA (Bank of America, 2008)

Figure 3.3 Pro-Forma Combined Balance Sheet of ML and BoA (Bank of America, 2008)

To stabilize the financial market, on October 3rd, 2008, President George W. Bush signed Emergency Economic Stabilization Act of 2008 into law, including the authorization of Troubled Asset Relief Program (TARP), a $ 700 billion fund to buy toxic assets from financial institutions. US Treasury Department used the fund to inject $ 125 billion in capital through preferred shares and warrants to nine prominent financial institutions, including BoA and Merrill Lynch (Rhee, 2010). On November, Merrill Lynch submitted 10-Q for its third quarter, showing $ 8.25 billion pre-tax loss and difficulty in mitigating risk due to market illiquidity. By then, Federal Reserve had approved the acquisition under the Bank Holding Act, BoA and Merrill’s shareholder had also approved the deal, but the acquisition was still in pending. In early December Ken Lewis learned Merrill was expected to incur $ 12 billion losses from its exposure to MBS and related securities in the fourth quarter, $ 3 billion increase from the estimate just 6 days before. Ken Lewis did not inform shareholders of Merrill’s losses, but he then advised the board about it. Lewis was considering canceling the deal through the merger agreement’s Material Adverse Change (MAC) clause. The MAC would have allowed BoA to terminate the deal based on material change in events after the signing of the merger agreement but before closing the deal. Ken Lewis informed the Treasury Secretary and Federal Reserve Chairman, Henry Paulson and Ben Bernanke, that he was considering terminating the deal. Paulson and Bernanke advised Lewis against it, considering the adverse consequences should Merrill Lynch collapse that potentially add more systemic risk and uncertainty to the market (Rhee, 2010). They believed that Merrill could not survive independently and would collapse like Bear Stearns and Lehman Brothers.

Four days later Ken Lewis met Paulson again, to talk about exercising the MAC. Paulson responded by threatening to fire Bank of America’s board and management if the company terminate or renegotiate the acquisition. The next day, BoA board met to discuss the acquisition decision, whether it was still beneficial to BoA or not, Lewis also expressed that “the Treasury and Fed would remove board and management of the corporation” if they invoke the MAC clause. The government, however, gave verbal assurance of financial assistance through TARP and provides downside protection against asset value decline. The government also argues that there is weak legal base for BoA to exercise MAC, as stated below:

“Material Adverse Effect” shall not be deemed to include effects to the extent resulting from . . . changes in . . . general business, economic or market conditions, including changes generally in prevailing interest rates, currency exchange rates, credit markets and price levels or trading volumes in the United States or foreign securities markets, in each case generally affecting the industries in which such party or its Subsidiaries operate and including changes to any previously correctly applied asset marks resulting there from . . . except . . . to the extent that the effects of such change are disproportionately adverse to the financial condition, results of operations or business of such party and its Subsidiaries, taken as a whole, as compared to other companies in the industry in which such party and its Subsidiaries operate . . . (Rhee, 2010).

At the time, Merrill Lynch deteriorating performance was caused by the general economic condition and it was not necessarily worse than its peers. Bank of America stock had declined from $ 24/share in September 2008 to $ 6.58 in December 2008 after announcing its acquisition of Merrill Lynch, as the market think Merrill would be a liability to BoA.


Part II: Analysis and Discussion

In this part, we display our own valuation using only income statement from 2004 to 2008, which we believe reflect the available information at December 2008 when Ken Lewis was making the decision whether to close the deal. We do valuation on Bank of America, Merrill Lynch, and the pro-forma post M&A projection of BoA-ML.


BOA valuation

Figure 4.1 Bank of America Condensed Income Statement Projection (without M&A)

We projected BoA net interest income to be declining in the next three years due to the low interest rate policy conducted by Federal Reserve combined with the reluctance of business and individuals to lend and increase consumption. Non-interest in come is expected to be stable somewhat due to the need for retail consumer conducting day-to-day business activities. The combination of declining interest income and stable non-interest income is expected to results in a decline of total revenue of 12% in 2009, 13% in 2010, and began to stable in 2011.

Provision for credit losses is expected to be high in 2009, as foreclosure remains high due to the rising trend of unemployment since 2007. The decline in house price nationally below mortgage value may also leave homeowners no choice but to default. The rest of homeowners are expected to face difficulty in servicing their debt, leading to higher non-performing loan as well.

Operational expense is expected to decline until the economic condition improves, the efficiency possible are layoff, selloff in assets, and streamlining the business in general. Assistance from the government through TARP and preferred stock are expected to incur significant cost to BoA common equity shareholders, leading to a marked decline in net income available to common shareholders. Preferred stock would then be terminated gradually as the company generates excess cash.

Figure 4.2 Bank of America Free Cash Flow to Equity Valuation Method

Using the assumption above, we derived the expected free cash flow to equity for the next three years and valued the company using FCFE method. It results in Bank of America fair value of $ 22.85/share, a significant premium to December 2008 share price of $ 6.58, but only half the share price trading one year before. It was common during crisis that shares are trading significantly below its fair value due to the fear of sustained worsening economic condition and potential bankruptcy. Our valuation was in line with BoA stock price before announcing Merrill’s acquisition. Nevertheless, we are confident in our valuation based on the financial ratio displayed in figure 4.3. We believe Bank of America has an adequate financial position due to business diversification and more manageable exposure to mortgage compared to investment bank that securitize the mortgage.

Figure 4.3 Bank of America Financial Ratio 2004 – 2011F


ML valuation

Figure 5.1 Merrill Lynch Condensed Income Statement Projection (without merger)

Unlike BoA, Merrill Lynch worst performance is expected to be in 2008 due to the loss of mark-to-market securities that it holds. Merrill’s business is expected to stabilize quickly in 2009 as investment-banking job tends to be short term in nature and have an increasing demand, especially during market turmoil. Breakdown of expected Merrill Lynch revenue is available at the appendix. Merrill Lynch is projected to also reduce the number of employee and streamline the business in an effort of cost reduction. Government assistance in the form of preferred stock would also be gradually paid as the company’s condition improves. At the time, Merrill’s main concern was to avoid bankruptcy at all cost.

 Figure 5.2 Merrill Lynch Free Cash Flow to Equity Valuation Method

Using the estimated projection above, we use FCFE method to value Merrill Lynch and derive equity fair value of $ 7.76/share, half of Merrill’s stock price trading at December 2008, and a 73% discount to the agreed acquisition price ($ 29/share). Merrill’s loss in 2008 alone nearly wipes its equity value, meaning that unless Merrill was acquired imminently, it would fail. Another signal of the potential failure of Merrill Lynch was showed by its Capital Adequacy Ratio (CAR) and Tier 1 Common Capital Ratio, which were below 8% and 4%, respectively, as mandated by Federal Reserve (figure 5.3).

Figure 5.3 Merrill Lynch Financial Ratio 2004 – 2011F


BOAML post-acquisition valuation

In this part, we did valuation on post-M&A of BoA and ML including the synergy that may be resulted. The underlying assumption of the projection is similar to those we use when evaluating Bank of America and Merrill Lynch independently. Acquisition of Merrill Lynch is expected to contribute significantly to BoA non-interest income, while the efficiency from overlapping infrastructure and employee is projected to reduce the operational expenses by 25% – 30% in 2009 compared to the previous year (figure 6.1).

Figure 6.1 BoA and ML Post Merger Income Statement Projection 2004 – 2011F

The number of shares outstanding has also counted the effect of dilution from Merrill’s common stock conversion to BoA common stock; previously in December 2008 there was 4.5 billion of BoA common stock outstanding, with 0.8595 conversion factor for ML’s stock, there is now 5.6 billion shares outstanding.

Figure 6.2 Synergy Potential of BoA – ML M&A (pre-tax)

We projected efficiency of 90% in the operational expense of BoA-ML, apart from the efficiency done by each company separately. The M&A is expected to save $ 5.4 billion in 2009 alone and a net present value of $ 58.5 billion pre-tax (figure 6.2).

Figure 6.3 BoA – ML Free Cash Flow to Equity Valuation Method

Using the projection above, we use FCFE to derive at the equity value of BoA after Merrill’s acquisition. Our valuation results in equity fair value of $ 22.87/share, it reflects 12.55x 2009F earnings and 9.46x 2010F earnings, historically BoA traded at 11-13x its current year earnings. Supplemental financial ratio of the projected incomes statement is displayed by figure 6.4.

Figure 6.4 BoA – ML Post Merger Financial Ratio 2004 – 2011F

The acquisition of Merrill Lynch by Bank of America, according to our valuation, is expected to create a market value of synergy of $ 14.7 billion. In December 2008, the market capitalization of both banks are at the low point of $ 46.5 billion combined, while our valuation of both banks result in fair market capitalization of $ 114.5 billion. After M&A, our valuation shows that the fair market capitalization is $ 129.2 billion, or a synergy value creation of $14.7 billion (figure 6.5).

Figure 6.5 Market Valuation of BoA – ML M&A Synergy


Part III: Conclusion and Recommendation

In this part we are going to summarize the event leading to the point Ken Lewis had to make a decision whether to close the deal for acquiring Merrill Lynch. Then we outline our recommendation as if we are on the side of BoA management.



In late December 2008, Bank of America CEO, Ken Lewis, was contemplating whether to close the deal for acquiring Merrill Lynch, a prominent investment bank that was suffering great loss from its exposure to Mortgage Backed Securities. He had learned earlier that Merrill Lynch was incurring large losses beyond what the September 2008 due diligence expect, meanwhile the stock price of Bank of America itself had been declining 73% since announcing Merrill’s acquisition in September. He was considering exercising the Material Adverse Change clause to cancel or renegotiate the deal, however, he was pushed by the Treasury Secretary and Federal Reserve to close the deal without renegotiating further, as it was expected to increase the systemic risk to financial market. The government even threatened to fire Bank of America board and management if they attempt to cancel or renegotiate the deal.

On the agreement in September, BoA agrees to acquire Merrill Lynch for $ 29/share with conversion ratio of 0.8595 to BoA common stock, a 70.1% premium at the time. At the time, BoA was trading between $ 30-35/share, while Merrill was trading between $ 15-25/share. On December 31, as the crisis worsen, BoA was trading at $ 6.58/share while ML was trading at $ 13.25/share. Lewis was thinking whether the acquisition might jeopardize the going concern of Bank of America and incur losses to BoA shareholders.



Our recommendation is for BoA to renegotiate the acquisition price with Merrill Lynch, decreasing the acquisition price to below $10/share. At such price, BoA has more room for error, in case Merrill’s asset turn to be worse than previously expected. As CEO of a public company, Ken Lewis has the fiduciary duty only to shareholders and should not be impaired by threat made by other parties, including government official. Even in he was fired due to the negotiation or cancelling the deal, he should be proud for doing his job well. Closing the deal at the time would mean overpaying for Merrill Lynch stock, a contrary of JPMorgan acquisition of Bear Stearns at a discount of 60% few months earlier. Renegotiating the deal would give BoA more leverage as the time passes, Merrill Lynch would be forced to take any deal it could because it knows that it could not survive independently, and filing for bankruptcy would leave shareholders with nothing.

By lowering the purchase price, BoA shareholders would be benefitted through lower dilution in ownership and higher synergy value created from efficiency of the firms at the expense of Merrill Lynch shareholders. Closing the deal could potentially brought BoA to a difficult condition, especially if MBS and other derivatives value continue its decline. In December 2008, BoA market capitalization ($ 30 billion) was only twice Merrill’s ($ 16 billion). In the acquisition, the liabilities of Merrill Lynch are transferred to BoA, therefore BoA wants to pay as little, but fair for the value of Merrill Lynch in general. The due diligence over the weekend done in September could not possibly be comprehensive for firm with the size and complexity of Merrill Lynch, therefore renegotiating the deal after a more in depth analysis makes sense.



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Merrill Lynch & Co. (2003). Form 10-K 2003. Retrieved from SEC EDGAR website http://www.sec.gov/edgar.shtml

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