B of A Buys Countrywide: Let’s Read the Press Release
Jan 11th, 2008 by John Stodder
Let’s do a quick tour of what’s being said about Bank of America’s purchase of Countrywide.
The press release is always a good place to start. What do the principals want you to think? What are they willing to say in the face of all evidence to the contrary? First, the lede:
Bank of America Corporation today announced a definitive agreement to purchase Countrywide Financial Corp. in an all-stock transaction worth approximately $4 billion.
I am not in the banking business. I don’t know why the word “definitive” is necessary in the first sentence. If they left out “definitive,” did they think we’d conclude it was all just a guess?
The purchase will make Bank of America the nation’s largest mortgage lender and loan servicer. This is an important advancement in the company’s desire to help customers and clients meet all of their financial needs. A mortgage is one of the key foundations of many customer relationships.
Here is why press releases drive me crazy. Two days ago, Countrywide’s stock took a Lucifer-like dive, and bankruptcy was looming. According to this, however, B of A’s rescue of Countrywide is “an important advancement.” Yes, it is, in the sense that B of A’s CEO has coveted Countrywide for a while. But let’s not pretend what the real news is. Without B of A stepping in, Countrywide was days away from going under.
Countrywide will benefit from the stability of being part of the largest and one of the most financially strong financial institutions in the United States.
Just like a guy who had a heart attack “will benefit from the stability” of being in a hospital.
Bank of America will benefit from Countrywide’s broader mortgage capabilities, including its extensive retail, wholesale and correspondent distribution networks. The Calabasas, California-based company operates more than 1,000 field offices and has a sales force of nearly 15,000.
Not for long. Analysts expect significant layoffs and office closures.
Countrywide also has a leading mortgage technology platform, a well known brand in home lending
True. It’s well-known. But how many people had heard of Countrywide before the subprime mortgage explosion?
and management expertise in a number of key areas.
Bank of America would gain greater scale in originating and servicing mortgages in the U.S. Countrywide had $408 billion in mortgage originations in 2007 and has a servicing portfolio of about $1.5 trillion with 9 million loans. The purchase also includes Countrywide’s Lender Placed insurance and other businesses.
“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 Chief Executive Officer Kenneth D. Lewis said.
Indeed, this is a moment when relatively strong organizations can gobble up distressed firms. This story from Reuters names Washington Mutual, First Horizon National Corp, National City Corp. and KeyCorp as possible acquisitions in the near-term. Shares in all four companies rose in anticipation of the cavalry coming to save them, too.
“Countrywide customers will gain access to a broad set of consumer products including credit cards and deposit services. Home ownership is a fundamental pillar of the U.S. economy and over time it will be a key area of growth for Bank of America.”
That’s nice. But will it offset the half-billion dollar tax break B of A will get, according to Fortune’s Allan Sloane?
“We are aware of the issues within the housing and mortgage industries,” Lewis continued. “The transaction reflects those challenges.
Finally. Reality, though observed with a curious passivity. I thought it was only Marxists who believed in economic determinism. This also reminds me of Chauncey Gardiner’s philosophy: “In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.” At least he didn’t talk about that legendary Chinese character that means both “crisis” and “opportunity.”
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.”
The “relationship product” coinage threw me for a second, but apparently this is a term commonly used in the consumer banking business. You sell someone a mortgage, and that opens the door for banks and credit unions to sell them other stuff. Because of this relationship you’re having now.
Here’s my question: If the relationship was so important, how come my mortgage company sells off my mortgage to another mortgage company every couple of years? Was I not holding up my end of the relationship?
Countrywide’s deep retail distribution will enhance Bank of America’s network of more than 6,100 banking centers throughout the U.S. After closing, Bank of America plans to operate Countrywide separately under the Countrywide brand with integration occurring no sooner than 2009.
“We believe this is the right decision for our shareholders, customers and employees,” said Countrywide Chairman and Chief Executive Officer Angelo R. Mozilo.
It certainly is looking like the right decision for Angelo Mozilo. He will exit with a severance package valued between $36-$115 million, a tidy sum for someone the AFL-CIO’s investment director described as “a failed and overpaid chief executive.” Zac Bissonnette of Blogging Stocks calls it “an absolute parody of corporate governance.” LABizObserved’s Mark Lacter predicts “a field day” for shareholder activists.
“Bank of America is one of the largest financial institutions in the U.S. and internationally, and we are confident that the combination of Countrywide and Bank of America will create one of the most powerful mortgage franchises in the world. We have had a long and positive relationship with Bank of America and our servicing and origination businesses, as well as other aspects of our operations, will be substantially enhanced as a result of this transaction.”
Apart from the opportunity presented by Countrywide’s distress, there is a good rationale for the acquisition. Buying a mortgage lender was one of a limited set of opportunities for dramatic growth available to Bank of America. Compete.com analyzed the potential benefits of this marriage back in March 2007. Its blogger, Bryan Revis
compared the number of people shopping (a.k.a. researching) for a mortgage or home equity loan on both websites from July through December of 2006. Despite the ease of shopping for mortgages on multiple sites when surfing the web, we discovered that very few people were visiting both Bank of America and Countrywide’s websites. In fact, by acquiring Countrywide, Bank of America would almost double the number of people shopping for a mortgage on its website every month.
Portfolio.com’s Felix Salmon points out that if B of A had just let Countrywide go bankrupt, it “would have likely walked away with most of the firm’s assets in any case.” However,
(T)he thing to remember is that BofA’s Ken Lewis has coveted Countrywide for years: he has pretty much always been willing to buy the company at or slightly above the market price. He was faced with an opportunity to by Countrywide for little more than a rounding error in the BofA balance sheet: if he let it slip away from him now, he’d never forgive himself.
And Bank of America has now, overnight, become by far the biggest and strongest and most important operator in the world of US mortgages. Over the long term, that status is going to be hugely valuable for Lewis, even if he has to take some write-downs along the way.
Finally, the Countrywide acquisition solidifies BofA’s status as a consumer bank, and helps Lewis’s decision to move slowly out of the investment-banking business look strategic. Investors know that if BofA suffers losses, it will be because of errors in lending, and not because some trading desk suddenly blew up one morning. Given that commercial banks trade at higher multiples of earnings than investment banks, that’s valuable to Lewis too.
Marketwatch columnist Herb Greenberg detects the Federal Reserve’s maneuvering this deal behind the scenes, and also assumes B of A has been assured the government will share in its risk. However,
There was nothing in the press release about that, so let’s give them the benefit of the doubt and say BofA is shouldering all of the risk and at this price it believes the risk is worth the reward.
Let’s close with the question on everyone’s mind: How did the lawyers do? WSJ.com’s Law Blog totes up winners and losers:
There are of course the M&A lawyers who start out 2008 cashing in on this whiz-bang deal. Bank of America was advised by our neighbors at Cleary Gottlieb and K&L Gates. Countrywide was represented on the deal by Wachtell.
One issue these lawyers are surely wrestling with: B of A’s legal exposure in snapping up the troubled mortgage lender. As reported by Law Blog colleague Amir Efrati & Co., Countrywide faces a barrage of borrower suits and investigations by federal and state agencies for alleged lending and loan-servicing abuses as well as shareholder suits stemming from its financial decline.
Plaintiffs are likely licking their chops at the prospect of being able to go after B of A’s deep pockets versus the real possibility of having had to pursue their claims in bankruptcy court.
Speaking of bankruptcy court, one group of lawyers that are probably saying “aw shucks” are the restructuring lawyers that would’ve handled what many Wall Streeters thought was an inevitable Countrywide Chapter 11 filing. That could’ve been lucrative work.
Almost everything about this deal is “lucrative work” for somebody. You could almost forget that behind it all are thousands of people of modest means, in danger of losing their homes. Oh, the trouble they’ve caused!
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