Bank of America will become the country's largest mortgage lender and servicer if its agreement to purchase the beleaguered Countrywide Financial is approved by both companies' shareholders and regulatory agencies.
Late yesterday, Charlotte, N.C.-based Bank of America revealed that it had agreed to buy 100 percent of Countrywide, based in Calabasas, Calif., for $4 billion. Bank of America will exchange 0.1822 shares of its stock for every one share of Countrywide's stock. That swap is equal to 31 percent of Countrywide's common book value, but it appears that Countrywide-which earlier this week deflected rumors about its impending bankruptcy-determined this deal was the best it could negotiate and remain solvent.
"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," said Ken Lewis, Bank of America's chairman and CEO, who in previous comments had stated that he didn't like mortgage companies as investments because of their valuations.
The acquisition of Countrywide gives Bank of America a dominant position in all sectors of consumer banking and mortgage lending, and completes a trifecta that started in 2003 with its $48 billion acquisition of FleetBoston Financial, and continued in 2005 with its $35 billion purchase of MBNA, which made Bank of America the country's largest issuer of credit cards.
During a teleconference with analysts this morning, Lewis and Joe Price, Bank of America's CFO, provided few details about how the two companies would merge, such as the fates of Countrywide's 15,000 employees. It is also not clear where this deal leaves the joint venture between Countrywide and KB Home. Countrywide processed 79 percent of KB's 23,743 deliveries last year. "Countrywide has been a great business partner," said Dom Cecere, KB's CFO, during a teleconference with analysts earlier this week.
Lewis did reveal that Countrywide-which includes more than 700 banking locations and 200-plus servicing locations-would be run as a separate entity in 2008 and would be integrated into Bank of America's operations the following year, with systems integration projected to be completed by the third quarter of 2009. Lewis also said that Bank of America might retain the Countrywide brand in some form and envisioned Countrywide's mortgage reps working in some of Bank of America 6,100 branches.
Lewis said that Bank of America intends to continue to employ "a number" of Countrywide's senior-level executives. Countrywide's founder and current chairman, Angelo Mozilo, will stay on at least until the deal is completed later this year. "Angelo has said that he will do anything to help," said Lewis, "but after that I would guess he would want to have some fun." The New York Times reported this morning that Mozilo would be entitled to an exit package of $72 million.
If this acquisition goes through, Bank of America would be the nation's top mortgage lender, controlling 25 percent of the mortgage origination market and 17 percent of the mortgage servicing market. (Countrywide had $408 billion in mortgage originations in 2007 and has a servicing portfolio of about $1.5 trillion with 9 million loans.) However, Lewis was emphatic that the merged entity would not originate any subprime loans, and he also expects to eliminate large bulk mortgage purchases.
Apparently this deal has been in the works for a while. Price said that a team of more than 60 people at Bank of America had been conducting due diligence for the past 90 days. The price that team arrived at, and Countrywide has agreed to, takes into account potential mortgage-related litigation and the significant erosion in Countrywide's profitability and assets in 2007. Last August, Bank of America invested $2 billion into Countrywide to help keep it afloat, and Price estimates that another $2 billion in "capital issuance" (essentially, a further writedown of Countrywide's assets) would be necessary to maintain the capital neutrality of this deal.
Bank of America will take a restructuring charge of $1.2 billion to cover costs related to this acquisition. It projects $670 million in after-tax cost savings from the transaction, to be fully realized by 2011.
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