Bank Mega-Mergers Create Different Monsters

Two of the nation’s largest financial services organizations became even more dominant the first day of the year upon the completion of blockbuster acquisitions: Bank of America’s purchase of Merrill Lynch & Co., Inc. and the Wells Fargo & Co. acquisition of Wachovia.

While notable in terms of sheer size, the two combinations are expected to do little in terms of making a difference in the credit, receivables or collections markets, according to Dan North, chief economist at Euler Hermes ACI, a trade credit insurance firm.

“Banks aren’t lending not because of their capital position – they’ve been given money to lend (from the Troubled Asset Relief Program); but they’re operating from fear, from a lack of confidence. They’re waiting for things to improve,” North said. What little lending the banks are doing is with higher credit standards and tighter terms than in the past, he noted.

Nancy Atkinson, senior analyst with Aite Group, agreed that the credit pinch would continue, and it will be a challenging for all in the financial services arena.

The acquisition of Wachovia may give Wells better leverage with those debtors who had loans with both financial institutions, according to North. However, he cautioned that many businesses that have commercial loans are falling into the same hole as consumers in that they don’t have the funds to repay debts. As the economy stays weak and sales fall off, business cash flow is suffering, so they’re slowing down repayments of debts, he said.

Atkinson added that the Wachovia acquisition may help Wells with commercial debtors because a new larger deposit base provides a little more room to restructure loans before writing them off.

The new Wells now has 11,000 branches, 12,260 ATMs and Wells Fargo PhoneBank. The bank has community banks in 39 states and the District of Columbia. Wells Fargo serves 48 million banking households and is one of America’s largest private employers with 276,000 team members.

North doesn’t expect to see any advantage for the merged institutions until the economy improves, which is unlikely to occur until the second half of the year at the earliest.

Bank of America now has the world’s largest wealth management business, with approximately 20,000 financial advisors and more than $2 trillion in client assets. Global investment management capabilities will include approximately 50 percent ownership in BlackRock Inc., which at September 30 had $1.26 trillion in assets under management. Bank of America had $564 billion in assets under management in the same period.

But the Bank of America-Merill deal brings together two very different corporate cultures which may not be able to work together, according to Atkinson. Brokers tend to be risk takers while bankers are risk mitigators, she explained.

The combination also increases B of A’s debt and equity underwriting, sales and trading, and merger and acquisition resources.

Under terms of the agreement, shareholders of Merrill Lynch received .8595 shares of Bank of America common stock for each common share of Merrill Lynch.

As previously announced, Bank of America expects to achieve $7 billion in pre-tax expense savings, fully realized by 2012. Cost reductions will come from a range of sources, including the elimination of positions, and the reduction of overlapping technology, vendor and marketing expenses.