To Win BofA Investors, CEO Lewis Must Cut Merrill Costs
Bank of America CEO Kenneth Lewis is only beginning his quest to acquire Merrill Lynch and build a global financial empire. His next step: Getting his skeptical shareholders to agree that the $50 billion all-stock transaction for Merrill is in their interests, too.
To that end, Lewis may find the best way to woo his antsy investors, who must approved the Merrill deal, is to immediately brandish a very large cost-cutting axe. In announcing the Merrill buy, Lewis said there are nearly $7 billion in immediate costs cuts that can be made by 2012. Moreover, he vowed to act fast by making the Merrill acquisition "accretive to earnings" by 2010.
Based on Lewis' track record, this is no hollow boast. For instance, right after buying Chicago-based LaSalle National Bank for $21 billion, Lewis' team began wringing out $1.25 billion in immediate cost savings. The majority of those cuts occurred in LaSalle headquarter functions that overlapped with BofA's, including legal, accounting, human resources and other administrative areas. Many top LaSalle bankers were dropped as BofA scaled back middle-market lending to small commercial firms, giving an opening to rivals including Harris Bank and JP Morgan Chase.
Looking to expand on LaSalle's retail banking presence, BofA held off slicing into old LaSalle bank branches or dumping tons of front-line tellers, customer representatives and consumer lenders. The acquirer did, however, drop the LaSalle name in favor of Bank of America signage. The LaSalle purchase has been accretive to BofA earnings, according to the company.
Much of that same action plan is likely to be imposed on Merrill. While it's unclear if the Merill name will end up on the trash heap, BofA is already expected to absorb many of New York-based Merrill's headquarter functions into its own system. Moreover, it will seek to thin the ranks of U.S. -based brokers, while also tightening up staffing at Merrill offices in other parts of the world.
Indeed, squeezing out costs is part of the Lewis' manta ever since he started amassing nearly $100 billion in various financial assets ranging from investment firms to credit card processors upon being named CEO nearly eight years ago.
Nevertheless, the Merrill acquisition -- coupled with this year's buyout of sickly mortgage seller Countrywide Financial -- is rattling investors, who are concerned BofA is going to greatly dilute the company's stock price with the Merrill purchase.
Lewis will have to quickly address their worries. In doing so, he'll make a case that there's a big upside to the Merrill purchase and that there's gold to be found in deep costs cuts, increased earnings power and the expanded worldwide customer reach that the brokerage firm will provide BofA.