Bank of America Snaps Up Countrywide
Kurt Brouwer January 11th, 2008
Bank of America already had a significant investment in Countrywide and now it has agreed to buy the whole thing. Previously, we have seen other investors buying up stakes in depressed financial services companies (see Bill Miller of Legg Mason Value Trust: Buy Battered Financial & Housing Stocks and Investors Buying The Dogs of 2007).
This Bloomberg article spells out why BA is eager to buy Countrywide [emphasis added]:
Bank of America To Acquire Countrywide For $4 Billion (Bloomberg, January 11, 2008, David Mildenburg)
Bank of America Corp., the biggest U.S. bank by market value, agreed to buy Countrywide Financial Corp. for about $4 billion, taking over the largest mortgage lender during the worst housing slump in more than two decades…
…“There are near-term challenges, but where there are challenges, there are always opportunities,” Lewis said during a conference call today. “We view this as a one-time opportunity.”
Countrywide’s market value plummeted 85 percent to $4.5 billion during the past 12 months as the lender reported its first quarterly loss in 25 years. Lewis has said the U.S. housing slump probably won’t bottom until mid-2008.
Adding Countrywide’s $209 billion in assets to Bank of America’s $1.6 trillion would leave the combined companies second in size to Citigroup Inc., which had $2.35 trillion in assets as of Sept. 30. Bank of America’s market value is 20 percent greater than New York-based Citigroup’s.
…The purchase, expected to close in the third quarter, will add to earnings beginning in 2009, Bank of America said. Savings resulting from the combination will be about $670 million, with about a third of that coming next year, the bank said. Credit Review
Bank of America’s financial strength rating is under review for a possible downgrade because of integration, litigation and mortgage value challenges, Moody’s Investors Service said today. Moody’s affirmed the bank’s short-term ratings….
…Countrywide may represent the opportunistic deal-making that turned regional bank NCNB Corp., which Lewis joined as a credit analyst in 1969, into the most valuable U.S. bank. He was former Bank of America Corp. CEO Hugh McColl Jr.’s Texas point man in 1988 after the government-assisted rescue of failing First Republic Bank, the largest bank in the Lone Star State…
…`Great Technology’
“It is an absolute opportunity for Bank of America to acquire an infrastructure they admire, including Countrywide’s great technology, and, at these levels, it’s mitigating most of the asset issues,” he said…’
For BA this represents a golden opportunity to buy a market leader in mortgages at a very attractive prices. Smart move in my opinion. Some recent buyers of Countrywide stock may have actually made a profit too as the stock ran up quite a bit on the announcement of the deal.
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I have to think those holders of Countrywide CDs and money-market accounts are breathing sighs of relief right now. Any thought of a CFC bankruptcy would have had far-reaching effects.
Now, the next rumor out there is WaMu getting purchased by JPMorganChase. But wouldn’t that cause a problem with the statutory maximum on percentage of deposits Chase would be allowed to hold? Wouldn’t GoldmanSachs buying WaMu be a better fit?
Agreed Brad. I also think it’s a good move for BA shareholders. You raise an interesting point on JP Morgan and WAMU. However, that’s why they hire expensive lawyers. I’m sure they have a work around for that problem.
This is a horrible deal for BAC shareholders! CFC’s Balance Sheet is a train wreck full of toxic mortgages that never should have been made in the first place (they were number one in the subprime sector).
BAC made a huge mistake (to the tune of $2 billion!) less than 6 months ago when they originally invested in CFC. Since then, CFC’s stock has collapsed and their legal problems have mounted for repossessions and fraudulant underwriting and loan generation.
By buying CFC now for $4 billion in stock, the BAC CEO gets to keep his job and won’t have to recognize the >$1 billion loss on their earlier investment in the company. How is it that they made such an enormous mistake a few months ago, but now BAC is in a better position make the same call?
It’s not easy to try and catch a falling knife or an imploding company. A $1 billion loss is small change to BA. They now get the premier mortgage company in the country at an 80% discount. By definition, companies selling at an 80% discount are not without blemish. The discount should cover the legal problems nicely and Countrywide should give BA positive earnings accretion in 2009 and for many years in the future. As Baron Rothschild reputedly said, “Buy when the blood is running in the street.”
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