June 30, 2005
Posted by Gordon Smith

Bank of America is acquiring MBNA, which did a hostile takeover of Wilmington, Delaware in the 1990s, all the while bombarding me with credit card junk mail. As a result of the merger, Bank of America will become one of the largest card issuers in the U.S.

Reading official justifications for mergers is a bit like reading student exam answers: they all say basically the same thing, but some say it more artfully than others. B&A is citing -- you guessed it! -- cost savings and operational synergies.

In the wake of the deal, Bank of America said it expects to take a restructuring charge of $1.25 billion related to the transaction. It said it will cut costs by eliminating 6,000 jobs and by cutting overlapping technology, vendor leverage, and marketing expense.... "Today's announcement is not only about the creation of one of the world's largest card providers. That is compelling in and of itself," Bank of America Chairman and Chief Executive Officer Kenneth D. Lewis said in a statement. "But it's really a much larger story about two companies with complementary strengths."

Call me a skeptic, but CEOs always say this sort of stuff, and much of the time it is simply not true. Either the proclaimed synergies do not exist or the price paid by the acquiring firm is excessive. With recent and projected declines in the credit card industry, is this deal a good candidate for synergy infamy?

This is a governance problem with no good solution. Evaluating potential synergies is tough, especially for shareholders of the acquiring company (BofA), who are supposed to provide a check on managerial excess. Where will they obtain reliable information about the value of the deal?

  • The target company (MBNA) shareholders may squawk if the price is too low, but that is not the usual problem with friendly mergers. (In this case, the MBNA shareholders will end up with a 30% premium on their shares.)
  • The investment banks advising BofA are almost no help to BofA shareholders because their fairness opinions are a joke.
  • For the most part, regulators look at process, not substance.
  • And the managers who should be pursuing their shareholders' interests have agency problems galore.

Perhaps the best indication of deal quality is the acquiring company's share price in response to the announcement -- BofA's shares rose 2%, so that is a good sign -- but even share price is a very messy signal. So we plod along, approving most friendly deals and often regretting it later.

UPDATE: Somehow in my haste I failed to mention investor support services, such as Institutional Shareholder Services, which recently came out in favor of the P&G acquisition of Gillete. These services are a useful player, though they face the same problems as everyone else in evaluating the value (or not) of synergies.

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