THE BASIS POINT

Bank of America’s Merrill Lynch & First Republic Integration Issues

Bank of America’s Kiefer Sutherland-voiced ads make the firm sound smooth and certain. But after more than $100b in acquisitions since 2001 including troubled Countrywide and the Merrill Lynch deal that is set to close in the coming weeks, things might not be as smooth as they sound on TV. Bloomberg reports on the troubles with BofA’s Merrill deal (see below).

One thing this story doesn’t discuss is the huge issue they’ll have with higher-end banking clients if they try to tinker with the First Republic retail banking model. First Republic was a Merrill-subsidiary with locations in most big cities and offers critical differentiators like no ATM fees (no fees from them no matter what ATM you use, and they pay for any fees other banks charge when a customer uses another ATM) and personal bankers who are actually qualified and understand how to manage relationships. Even with the no-ATM fee situation alone, they’ve got a problem: the BofA customers incur fees for non-BofA ATMs, but the FRB customers don’t. When they reconcile this, it seems the BofA model will win and the pitch will be: “don’t worry, BofA ATMs are everywhere.” But that’s likely to cause attrition among First Republic customers who generally have the profiles retail banks dream of.

[BofA CEO Ken] Lewis, 61, called Merrill “the ideal long-term fit” when the deal was announced on Sept. 14. He will generate fees from Merrill’s 16,850-strong sales force and says he can slash $7 billion of costs with the combination, likely to be approved by shareholders today and to close by the end of the month. The firm’s $2.8 trillion of assets would vault it over Citigroup Inc. and JPMorgan Chase & Co. as the No. 1 U.S. bank.

Bank of America shares have dropped 58 percent since the all-stock purchase was struck, and Merrill is down 30 percent, valuing the $50 billion deal at $19 billion. Citigroup analyst Keith Horowitz wrote Dec. 2 that the firms may have combined writedowns of $5.1 billion in the fourth quarter and had $56 billion of “high-risk” assets at the end of September.

Merrill, founded by Charles Merrill in 1914, went public in 1971 and in 1974 introduced its corporate logo — a bull. Thain, 53, a former Goldman Sachs Group Inc. banker and New York Stock Exchange head who replaced CEO E. Stanley O’Neal following $2 billion of losses, struck the deal with Lewis to avoid becoming another casualty of the subprime crisis. Thain will oversee corporate and investment banking and wealth management, making him a potential successor to Lewis.

Bank of America spokesman Scott Silvestri declined to comment on whether the firm will retain the Merrill logo. People familiar with the company’s plans said in October that Bank of America plans to keep the Merrill brand.

Bank of America, already the nation’s biggest home lender and home-loan servicer, will become the largest brokerage firm in addition to being the biggest bank by assets. Now second to JPMorgan by deposits, the new firm may end up the No. 1 by that measure once Merrill’s deposits are added.

The chief draw for Lewis was Merrill’s brokers, who manage $1.6 trillion for customers. Merrill said last month said that 99 percent of its top-selling brokers agreed to sign retention packages.