What capabilities did the acquisition of FleetBoston Financial and MBNA provide BofA? How did the acquisition of Countrywide complement previous acquisitions?

Please do only question 4

CASE STUDY 4.4 Bofa Acquires Countrywide Financial Corporation On July 1, 2008, Bank of America Corp. achieving double-digit earnings growth. The (BofA) announced that it had completed its acquisition will help the firm realize that vision acquisition of mortgage lender Countrywide and create the second largest U.S. bank. Financial Corp. (Countrywide) for $4 billion, In 2003, BofA paid $48 billion for Fleet- a 70% discount from the firm's book value at Boston Financial, which gave it the most the end of 2007. Countrywide originates, branches, customers, and checking deposits purchases, and securitizes residential and of any bank in the United States. In 2005, commercial loans; provides loan closing ser- BofA became the largest credit card issuer vices, such as appraisals and flood determi- when it bought MBNA for $35 billion. nations, and performs other residential real The purchase of the troubled mortgage estate-related services. This marked another lender averted the threat of a collapse of a major (but risky) acquisition by Bank of major financial institution because of the U.S. America's chief executive Kenneth Lewis in 20072008 subprime loan crisis. Regulators recent years. in the United States were quick to approve BofA's long-term intent has been to become the takeover because of the potentially negative the nation's largest consumer bank while implications for U.S. capital markets of a major CASE STUDY 4.4 (cont'd) bank failure. Countrywide had lost $1.2 billion servicer, consistent with the firm's business in the third quarter of 2007. Countrywide's strategy, which is to help consumers meet exposure to the subprime loan market (ie, all their financial needs. BofA has been one residential loans made to borrowers with poor of the relatively few major banks to be suc- or nonexistent credit histories) had driven cessful in increasing revenue and profit fol- its shares down by almost 80% from year- lowing acquisitions by "cross-selling its earlier levels. The bank was widely viewed products to the acquired bank's customers. as teetering on the brink of bankruptcy as it Countrywide's extensive retail distribution lost access to short-term debt markets, its network enhances BofA's network of more traditional source of borrowing. than 6,100 banking centers throughout the Bank of America deployed 60 analysts to United States. BofA had anticipated almost Countrywide's headquarters in Calabasas, $700 million in after-tax cost savings in com- California. After four weeks of analyzing bining the two firms. Almost two-thirds of Countrywide's legal and financial challenges these savings had been realized by the end and modeling how its loan portfolio was of 2010. In mid-2010, BofA agreed to pay likely to perform, BofA offered an all-stock $108 million to settle federal charges that deal valued at $4 billion. The deal valued Countrywide had incorrectly collected fees Countrywide at $7.16 per share, a 7.6 dis- from 200,000 borrowers who had been facing count to its closing price the day before the foreclosure. announcement. BofA issued 0.18 shares of its stock for each Countrywide share. The deal Discussion Questions could have been renegotiated if Country- 1. How did the acquisition of Countrywide wide had experienced a material change fit BofA's business strategy? Be specific. that adversely affected the business between What were the key assumptions implicit in the signing of the agreement of purchase BofA's business strategy? How did the and sale and the closing of the deal. BofA existence of BofA's mission and business made its initial investment of $2 billion in strategy help the firm move quickly in Countrywide in August 2007, purchasing acquiring Countrywide? preferred shares convertible to a 16% stake 2. How would you classify the BofA business in the company. By the time of the announced strategy (cost leadership, differentiation, acquisition in early January 2008, Country- focus, or some combination)? Explain your wide had a $1.3 billon paper loss on the answer. investment 3. Describe what the likely objectives of the The acquisition provided an opportunity BofA acquisition plan might have been. to buy a market leader at a distressed price. Be specific. What key assumptions were The risks related to the amount of potential implicit in BofA's acquisition plan? What loan losses, the length of the U.S. housing were some of the key risks associated with slump, and potential lingering liabilities as- integrating Countrywide? In addition to sociated with Countrywide's questionable the purchase price, how would you business practices. The purchase made BofA determine BofA's potential resource the nation's largest mortgage lender and commitment in making this acquisition? CASE STUDY 4.4 (cont'd) BofA chose to acquire Countrywide rather than to pursue an alternative strategy? Be specific. 4. What capabilities did the acquisition of FleetBoston Financial and MBNA provide BofA? How did the acquisition of Countrywide complement previous acquisitions? 5. What alternatives to outright acquisition did BofA have? Why do you believe Answers to these case discussion questions are available in the Online Instructor's Manual for instructors using this book