Bank of America Chief Saw Merrill Purchase as a Rare Opportunity

Last Friday, Kenneth D. Lewis, chief executive of the Bank of America Corporation, was in his headquarters in Charlotte, N.C., pondering a possible acquisition of Lehman Brothers, the foundering investment bank.

By the next morning, Mr. Lewis already had a new target in his sights: Merrill Lynch. John A. Thain, Merrill’s chief executive, phoned Mr. Lewis about a deal and by Saturday afternoon the two men were encamped in a Bank of America apartment in the Time Warner Center overlooking Central Park.

Mr. Lewis, who walked away from a Lehman acquisition because the government would not safeguard buyers from possible losses, said in an interview that he and Mr. Thain had decided in just an hour to move forward with the $50 billion deal.

“We wanted to get the deal done by Monday,” Mr. Lewis said. “We were very focused about getting the deal done.”

On Monday, investors responded unenthusiastically to the hurried merger, which gives Bank of America a footprint in almost every facet of the banking business and vaults it into the upper tier of the nation’s financial institutions.

The bank’s shares dropped 21.3 percent on the news, although the market as a whole was also down sharply. Shares of Merrill, a sprawling brokerage and investment banking firm, were largely unchanged at $17.06, well below Bank of America’s offering price — initially valued at about $29 a share but now worth less than $23 a share because of Monday’s decline in Bank of America’s stock price.

Mr. Lewis had been eyeing Merrill for months, and while the transaction bears hallmarks of some of his previous deals — patience, daring and transformative — some analysts said that it shared similarities with the shotgun marriage Bank of America consummated with the Countrywide Financial Corporation this year.

It also smacks of the pell-mell merger that regulators helped arrange this year between another troubled company, Bear Stearns, and a large acquirer, JPMorgan Chase & Company.

“This deal is equally as important as the Bear Stearns deal,” said Nancy A. Bush, a banking analyst. “I certainly think the regulators are happy this deal got done.”

Mr. Lewis said regulators had not pushed him to acquire Merrill. He said the reason he had moved forward so quickly — and offered to pay a premium for a company with potentially toxic assets sagging under financial stress — was that he had not wanted to risk another buyer swooping in ahead of him.

Two other firms, Morgan Stanley and HSBC Holdings, were also in talks with Merrill, according to people briefed on the situation who requested anonymity because the negotiations were confidential. Morgan Stanley declined to comment. HSBC did not return calls seeking comment.

Still, bank advisers briefed on Federal Reserve talks last weekend said that there had been a real fear that Merrill would not survive unless someone rescued it.

In that regard, Mr. Lewis, ever the opportunist, saw an opening and seized it. The Merrill takeover allows him to complete his goal of transforming what was once a backwater North Carolina bank into a market leader.

It also tilts the center of American banking toward Charlotte, the home of both Bank of America and the Wachovia Corporation, its deeply troubled rival.

Overnight, the deal will make Bank of America the county’s largest player in wealth management. It already runs the biggest branch banking network and it is the biggest issuer of small business, home equity and credit card loans. The Countrywide deal made it the nation’s biggest mortgage lender, too.

“Bigger is better and biggest is best,” in Mr. Lewis’s worldview, Ms. Bush said.

Even so, the Merrill deal is laced with some contradictions. Only a year ago, Bank of America appeared to have given up on investment banking after suffering extensive losses in a business in which it had little experience.

Mr. Lewis had spent more than $625 million to expand into investment banking, only to see all of its trading businesses soaked in red ink. A few months ago he said at a conference that he would not spend “petty cash” for an investment bank.

Apparently, Mr. Lewis was willing to forgo those misgivings because he saw a Merrill takeover as a once-in-a-lifetime opportunity after years of a frustration trying to build an investment bank from scratch.

The deal would vastly expand Bank of America’s reach into equities and emerging markets. It strengthens its roster of top investment banking executives. And it gives the bank Merrill’s brand and its “Thundering Herd” of 16,000 brokers to help push its credit cards and loans.

“This was almost a perfect fit, and we thought it was close enough to the bottom that we could make the deal work and be very good for our shareholders,” Mr. Lewis said. “I don’t think it will come out of the doldrums in the next week or so, but as soon as the market gets its legs again, you will see a higher value.”

The stock market is more hesitant, concerned that Mr. Lewis may have moved so quickly that he could eventually find himself exposed to more troubled Merrill assets than he bargained for — in addition to the risky mortgage portfolio he inherited from Countrywide.

Mr. Lewis said he was confident that the deal was the right move, but conceded possible hurdles in the near term.

“Even people who acknowledge it is a good strategic decision think it is a rocky road ahead of us,” he said.

Mr. Lewis has more than decade of experience engineering big deals. Alongside his mentor and predecessor, Hugh McColl, he helped transform NationsBank, a small regional lender, into a consumer powerhouse with bicoastal branches before it snapped up Bank of America and took on its name.

In 2003, it bought FleetBoston Financial, greatly expanding his network of branches on the East Coast. He also has picked off MBNA, the credit card issuer, and U.S. Trust, the private bank, in the last few years.

Some analysts, however, think that Mr. Lewis may be taking on more than he can handle. Besides Merrill Lynch, Bank of America is still digesting the Countrywide merger and a smaller takeover of LaSalle Bank in Chicago.

Each institution is in a different type of business, financial position and geographic market, and will test Bank of America’s agility and Mr. Lewis’s managerial talents.

Mr. Lewis said that he was up to the task and that his mentor blessed the Merrill takeover. When he returned to Charlotte Monday afternoon, he said he discovered a laudatory note from Mr. McColl.

Typhoons weaken central bank’s hopes on inflation

MANILA, Philippines—Inflation in September as measured by the increase in the consumer price index may reach 12.6-12.7 percent and exceed the 17-year-high 12.5 percent in August, the central bank said Thursday, citing adverse effects of recent typhoons.

“Without the typhoons, inflation could have peaked in August, but because of the typhoons, that will really send prices higher, particularly of food,” Deputy Governor Diwa Guinigundo of the central bank, Bangko Sentral ng Pilipinas (BSP), said at a news briefing.

Guinigundo said the inflation rate would not reach 13 percent.

“There are other areas like Mindanao that were not affected by the typhoon,” he said. “Rice [prices] continues to go down. NFA [National Food Authority] continues to receive shipments of imported rice, bombarding key distribution outlets with more rice.”

“So it may rise to 12.6 percent or 12.7 percent [in September] and then decline afterward,” he said. “It won’t reach 13 percent. It’s losing steam.”

Investment bank DBS expects Philippine inflation to peak at 13 percent in October because of the lingering effects of the spike in oil and food prices in previous months.

“As has been the case globally, food and fuel prices are the only two things that have really mattered in the run-up in inflation, and indications now are that these trends are at least stabilizing, if not reversing,” DBS said in its latest assessment of the Philippine economy.

Global food and oil prices are easing but these will be felt only in November, it said.

The BSP expects to get a better picture of inflation when its policymaking Monetary Board meets on Oct. 9, Guinigundo said.

He said the policymakers would continue to keep an eye out for global oil prices even if recent trends were favorable.

The Philippines has an oil inventory enough for 70 days on average, Guinigundo said. That would be until November.

Guinigundo added that the high season for money remittances from overseas Filipino workers would begin in November and give the country enough foreign exchange to buffer global oil price volatility.

Analysts expect the central bank to raise its benchmark interest rates further, by as much as half a percentage point this year to fight high inflation despite a sluggish first-semester economic growth.

Vectra Bank Colorado Small Business index up slightly in August

The Vectra Bank Colorado Small Business Index for Colorado registered 87.6 in August, up from a revised 87.3 in July, according to data released Thursday.

“Colorado continues to outperform much of the rest of the nation in terms of job growth,” Jeff Thredgold, corporate economist for Vectra Bank Colorado, said in a statement. “The state’s latest 1.3 percent year-over-year growth rate would normally be nothing to write home about. But considering the U.S. economic struggles of the past year, Colorado’s employment performance is notable.”

Colorado’s unemployment rate was estimated at 5.2 percent in July, up from 5.1 percent in June and 3.8 percent a year ago, according to the state Department of Labor and Employment. Total employment has risen by 31,400 jobs during the past 12 months.

The unemployment rate is the most heavily weighted component of the index. A higher Colorado jobless rate is a positive contributor, as it suggests greater access to labor for small businesses.

The U.S. economy lost an estimated 84,000 net jobs in August, and the U.S. unemployment rate rose to a five-year high of 6.1 percent.

If the economy grows faster than expected, the Federal Reserve could raise a key short-term interest rate target by the end of the year. But if the economic outlook worsens or the credit markets freeze up again, as they did in late 2007, the Fed could cut rates again.

The Colorado Small Business Index assumes that most small businesses are net borrowers of operating funds. As a result, higher short-term interest rates would be a negative development for many small businesses, while lower financing costs would help.

The index measures business conditions from the viewpoint of the Colorado small business owner or manager. A higher number is associated with more favorable business “conditions” for Colorado’s small businesses. The index uses 100.0 for calendar year 1997 as its base year.

The U.S. Small Business Index rose slightly in August to 71.1 from the revised number of 70.1 in July.