Bank of America Corp.'s planned acquisition of FleetBoston Financial Corp. was the biggest banking deal announced last year and, at least for now, is the big question mark of this year.
Bankers, analysts, investors, and others continue to debate whether Bank of America would be able to make the deal work for shareholders without hurting customers. Can it hit its cost-cutting and revenue targets? Would the inevitable trauma of a big integration help competitors?
More than two months after B of A said it would buy Fleet for $47 billion - an eyebrow-raising 43% premium to Fleet's stock price at the time - such questions continue to spark lively debate.
"Nobody knows" what the outcome will be, said Charles B. Wendel, the president of Financial Institutions Consulting Inc. in New York. "You don't know about the value of a deal until five years after it's done."
Tom Brown, a hedge fund manager and a vociferous critic of megamergers, says studies of shareholder returns show that bank megamergers generally end up hurting, not helping, the long-term growth rates of the companies involved.
Judging by that historical evidence, he said the jury is already in - B of A cheated its shareholders. "The bigger the premium that you pay, the more likely that you are to fail the shareholders of the acquiring company."
The Federal Reserve Bank of Richmond, Va., has received more than 200 comments on the deal, some from community activists objecting to it. The Fed has scheduled hearings in Boston and San Francisco to hear these concerns, which conjure memories of the hotly debated 1999 merger of Fleet and BankBoston Corp.
Worries about integration risks and B of A's ability to meet its cost-saving objectives pushed its stock down 10% the day the deal was announced in late October, but a curious thing has happened since then. The stock has bounced back 8% and is trading very close to the levels it had reached before the deal was announced.
The gains came during a broader market increase, but B of A shares have outpaced other bank stocks. Over the same period, the American Banker index of the top 50 banks have gained 7%, while the Philadelphia Bank Stock Index has risen 5.7%.
The rebound would suggest at least some of the initial skeptics are warming to the transaction.
Steve Wharton, an analyst for Loomis Sayles & Co., criticized the deal when it was announced, mainly because of the high price and the difficulty he expected B of A to have in cutting costs and generating new revenues. But he has since softened his position.
B of A has outlined strategies for helping it outperform either company's pre-deal results, including reducing Fleet's tax rate, selling some or all of its private equity portfolio or Latin American operations, and pushing to close the deal two months early, in April.
"We are working hard to demonstrate the long-term value of the deal to our shareholders and that we're up to the challenge of the integration," Eloise Hale, a B of A spokeswoman, said Tuesday.
Mr. Wharton conceded that there are a lot of ifs, "but I think the point is that when you put all that together, it creates some flexibility" for B of A.
During the last two months Mr. Wendel and Mr. Brown have engaged in a friendly public debate about the deal. Ironically, Mr. Brown, a critic of B of A, had become a shareholder in recent years. He did not dump his position until August, on concerns it was taking on too much interest rate risk.
In a weekly newsletter, Mr. Wendel took issue with Mr. Brown's shareholder-oriented view, saying that Fleet employees knew it was takeover bait and actually favored the B of A deal, because it would supply much-needed capital and generate fewer layoffs than would likely happen otherwise.
"Fleet was kind of weighed down by some of its credit problems, and it clearly was not operating on full throttle," Mr. Wendel wrote.
A day later Mr. Brown wrote on his Bankstocks.com site that the deal would result in a "brain drain" from Fleet, as well as a mass customer defection.
Of course, that is exactly what Fleet's New England competitors are anticipating.
"Any time a major bank merger has taken place in the past, there has been fallout," said John P. Hamill, the New England regional chairman and chief executive officer of Sovereign Bancorp Inc. of Philadelphia. When B of A buys Fleet "there will be changes that take place no doubt because of system changes, procedure changes, new forms, and that sort of thing, and that impacts customers who are leery of those sort of things."
In an investor presentation last month, Kenneth D. Lewis, B of A's chief executive, acknowledged the criticism. "I know there is skepticism about whether we can make the merger with FleetBoston pay off," he said. "We believe investors have not given us credit for the long-term revenue opportunities."
He expects new revenues from consumer banking, such as additional sales of mortgages and home equity loans, as well as from commercial and corporate banking. B of A's investment banking unit could benefit from cross-selling to Fleet's corporate banking customers, he said. Fleet no longer has an investment bank, but it does have relationships with 30% of the businesses in its markets.
But the big plum could be services for the wealthy. B of A would acquire Fleet's Quick & Reilly brokerage, as well as a relatively wealthier set of customers, to whom it can cross-sell banking, lending, card, and other products.
"The opportunity to deepen share of wallet in the Northeast was compelling," Mr. Lewis said.
