Monday, September 15, 2008

Morning Pricing: Merrill and Bank of America

There have been all sorts of bankruptcies, mergers, and fed actions since the last update. Most blogs are All Lehman All The Time, so you will have no problems finding information about last night from them or even from the WSJ.

One observation: Bank of America announced a shotgun marriage with Merrill last night. Both boards approved the all-stock offer, which was 0.8595 BAC shares for each MER share.

As I write this, the implied price of Merrill is supposed to be
0.8595 * 28.62 (current BAC price) = 24.59889

We also note that S&P downgraded Bank of America this morning.

Combining the above factoids tells us that
1. There is considerable doubt in the market that the deal will close.
2. If the deal closes, the net result might be to take down BoA, rather than prop up Merrill.

Update @ 11:35a

Merrill should be 0.8595 * 28.76 = 24.72
and is currently 21.18.


hugues da mousse said...

disagree -- bank of america's down because the deal will go through -- it's normal for a buyer's stock to go down -- you shoot off your mouth without knowing what you're talking about

JP said...

bank of america's down because the deal will go through

You need to look up arbitrage. Then comment.

It does not matter whether BAC is up or down. It matters what MER does relative to BAC.

If the deal goes thru, every MER share is worth 0.8595 of the CURRENT BAC value.

And right now, that equivalence isn't there.

Anonymous said...

There's no financing risk as the transaction is all stock. So, I think JP has it right. What we are looking at here is deal risk being priced in.

ProblemWithCaring said...

JP is right: Thane was sweating bullets hedging as much for the Bloomberg reporter who questioned why BOA stocks were taking a hit. Lewis was just as squirrelly about why they took ML at that Friday price today, KNOWING it could only go down..

It all stinks, but rightly BOA figures that SOOOO much shit is coming down the pike that it will be able to slip its minor (in comparison) shit under tha radar.