Bank of America to buy Countrywide for $4.1 billion; deal sparks rumors of other banking mergers

By Evan Weinberger

New York, Jan. 11 - Bank of America Corp. agreed to buy up Countrywide Financial Corp. for $4.1 billion Friday morning.

The deal makes Bank of America the largest mortgage originator and services provider in the United States.

"Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation's premier lender to consumers," Bank of America chairman and CEO Kenneth D. Lewis said in a statement announcing the deal.

Countrywide stockholders will receive 0.1822 shares of Bank of America stock in exchange for their shares. The deal valued Countrywide stock at $7.16. That represents a 7.6% discount on Countrywide's closing stock price Thursday of $7.75.

"We believe this is the right decision for our shareholders, customers and employees," said Countrywide chairman and CEO Angelo R. Mozilo in a news release.

Right decision or not, investors were apparently unhappy with the terms, and the stock in the Calabasas, Calif.-based company dropped.

Countrywide stock (NYSE: CFC) lost $1.42, or 18.32%, to close at $6.33.

Bank of America stock (NYSE: BAC) fell 80 cents, or 2.04%, to $38.50.

Countrywide stock has been battered over the last year. The stock has lost 71% of its value since Bank of America pumped $2 billion into Countrywide in a preferred stock deal in August. It has lost 80% of its value at this time last year. America's largest mortgage lender had come to be seen as one of the symbols of the bad bets of the subprime mortgage meltdown.

The deal to buy Countrywide, many observers said, represented a big loss on Bank of America's original investment.

With Merrill Lynch reportedly about to write down $15 billion in losses tied to bad loans and house prices continuing to drop, it appears that the subprime fallout is far from over. "We are aware of the issues within the housing and mortgage industries," Lewis continued. "The transaction reflects those challenges. Mortgages will continue to be an important relationship product, and we now will have an opportunity to better serve our customers and to enhance future profitability."

While the deal, which is scheduled to close in the third quarter, is reportedly getting blessings from regulators, there is still a chance they may balk. With the addition of Countrywide's savings bank, Charlotte, N.C.-based Bank of America will brush up against federal regulations that state a single bank holding company can't hold 10% of U.S. bank deposits. The rules apparently do not apply to Countrywide's banking operation since it is a federally insured savings and loan.

As details of the deal come out, investors will be weighing the likelihood that regulators will block it. One market watcher said the risk-arb spread he saw on the deal going through was about 9%.

At the end of the day, though, he expects that the deal will go through. "Big picture, nobody wants Countrywide to go under," he said. "That would not be a good thing for anybody except for someone who's shorted the stock."

Bank of America said the acquisition would not affect its earnings for 2008. The company will set aside $1.2 billion for one-time restructuring costs and said it expects to see $670 million in tax savings.

And Countrywide won't be exiting the corporate lexicon any time soon. Bank of America said Countrywide won't be completely folded into its corporate structure until 2009.

Countrywide can't save stocks

Word that Countrywide and Bank of America had been in merger talks for weeks slipped out Thursday afternoon. That sent the markets surging Thursday.

The deal coming through didn't have the same effect Friday. The Merrill Lynch write-down and profit warnings from American Express due to increased credit card defaults dominated investors' minds.

The Dow Jones Industrial Average flirted with losing 300 points on the day, but in the end the index lost 246.79 points, or 1.92%, for a 12,606.30 close.

The Nasdaq tumbled 48.58 points, or 1.95%, to close at 2,439.94.

The Standard & Poor's 500 closed at 1,401.02, a drop of 19.31 points, or 1.36%.

Countrywide deal sparks other deal talk

One of the knock-on effects of the Countrywide- Bank of America deal is speculation that other banks and mortgage lenders stung in the subprime mess will look to similar deals.

That may happen, but one market watcher said it will be a last resort. "It's safe to say there are a lot of finance companies out there that need additional cash," he said. "If the answer to that is being bought, I think it's an alternative. You may see these companies trying to raise some cash in the market on their own before going down that road."

He pointed out that Citigroup, Merrill Lynch and other large investment banks have already gone to foreign sovereign wealth funds to get cash. And Merrill is rumored to be looking for more foreign money to help it pull through the coming mortgage-related write-down.

Reports of one potential deal surfaced on CNBC Friday morning. The cable channel reported that Seattle-based savings and loan Washington Mutual Inc. had entered into talks with New York-based JPMorgan Chase & Co. The talks were said to be in the very preliminary stages.

"Eh, maybe," was one trader's response to the rumored talks.

Washington Mutual stock (NYSE: WM) moved up 53 cents, or 3.74%, to $14.69 on the speculation.

JPMorgan Chase (NYSE: JPM) was down 47 cents, or 1.14%, to $40.86 on the day.

The trader speculated that Spanish banking giant Banco Santander could ride to the rescue of Philadelphia-based Sovereign Bancorp.

Sovereign stock (NYSE: SOV) was down 3 cents, or 0.28%, to $10.68 Friday.

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