Analysis of the

Bank of America and

FleetBoston Merger

Kevin Rodriguez
April 27, 2004
FIN 5154
Table of Contents

Table of Contents............................................................................................................................ 2
Introduction..................................................................................................................................... 3
Why Merge?.................................................................................................................................... 3
FleetBoston ................................................................................................................................. 3
Bank of America ......................................................................................................................... 4
The New Bank of America ............................................................................................................. 5
Effects on the Banking Industry ..................................................................................................... 7
Conclusion ...................................................................................................................................... 8
Exhibit 1: FleetBoston ROE Analysis, 2001 10.......................................................................... 9
Exhibit 2: FleetBoston ROE Analysis, 2002 11........................................................................ 10
Exhibit 3: FleetBoston ROE Analysis, 2003 12........................................................................ 11
Exhibit 4: Bank of America ROE Analysis, 2001 13 ............................................................... 12
Exhibit 5: Bank of America ROE Analysis, 2002 4 ................................................................. 13
Exhibit 6: Bank of America ROE Analysis, 2003 14 ............................................................... 14
Exhibit 7: Bank of America and FleetBoston Geographic Presence 15 ................................... 15
Exhibit 8: The New Bank of America: Statistical Highlights 1,16 ........................................... 16
Exhibit 9: New Bank of America Pro Forma ROE Analysis, 2004......................................... 17
Exhibit 10: New Bank of America Pro Forma ROE Analysis, 2005....................................... 18
Exhibit 11: New Bank of America ROE Sensitivity Analysis ................................................ 19
Exhibit 12: Bank of America and FleetBoston Revenue Mix 15.............................................. 20
Cited References ........................................................................................................................... 21

2
Introduction

In October 2003, Bank of America (Charlotte, North Carolina) and FleetBoston (Boston,

Massachusetts) announced their intentions to merge. The federal government and bank

shareholders approved the merger in early 2004. The two banks officially became one on April

1st, 2004. Bank of America’s acquisition of FleetBoston cost the company $47 billion in stock, a

roughly 40% premium over FleetBoston’s market share price at the time the merger was

announced.

This paper examines the impetus behind the merger from both Bank of America and

FleetBoston’s perspectives. It then explores how the newly merged bank will benefit from the

merger and what type of financial performance might be expected based on the prior financial

performance of each bank. Finally, the paper closes with a brief discussion on how the Bank of

America/FleetBoston merger is likely to affect the banking industry as a whole.

Why Merge?

FleetBoston

Shortly after the merger was announced, FleetBoston CEO Charles Gifford stated that his

company had been searching for a merge partner for over a year. "It became increasingly clear

that scale is a tremendous advantage, if properly managed," he said. "We did not have the scale

of other banks." 1 More likely, however, is that FleetBoston’s poor financial performance in

previous quarters led management to that decision. Many in the banking industry believed

another round of consolidation would coincide with economic recovery and FleetBoston’s poor

performance indicated the inability to compete in a further consolidated market. These trends

made FleetBoston a prime candidate for acquisition by a healthier bank.2

3
 FleetBoston’s financial woes began in 2001, sparked by extensive credit losses (up 80%

over 2000) in Latin and South America. The bank’s ROE dropped from 22% in 2000 to 5% in

2001 and the credit loss reserve jumped 35%. Similar poor performance carried into 2002 as

ROE barely eclipsed 7%. Continued losses in Argentina, the energy sector and the airline

industry (primarily due to United’s bankruptcy) hampered income.3 In both 2001 and 2002 the

bank was plagued by high loan loss provision-to-earning asset ratios. FleetBoston made

significant financial improvements in 2003, but by that time they were already well on the road

to acquisition. Complete ROE analyses for 2001-2003 are available in Exhibits 1-3.

Bank of America

While FleetBoston struggled in the recession following the bubble collapse of 2000,

Bank of America’s earnings continued to soar due to strong performance in domestic

commercial loans, residential mortgages and credit card revenue.4 Despite lower net interest

margins than FleetBoston, Bank of America did not encounter severe credit problems and thus

earnings were not impacted by charge-offs to the extent that FleetBoston was affected. Complete

ROE analyses for 2001-2003 are available in Exhibits 4-6.

The bank began seeking acquisition targets that could increase its geographic expanse

and enhance its already strong retail banking business. In 2002, Bank of America operated

primarily in the southeast, south, west coast, and had limited operations in the southwest and

midwest. Notably absent was a presence in the wealthy northeast market, a market in which

FleetBoston had a significant presence. (See Exhibit 7 for a map of each bank’s geographic

coverage.) Thus, FleetBoston became Bank of America’s prime acquisition target.

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The New Bank of America

The merged banks will retain the name Bank of America. Current Bank of America CEO

Kenneth Lewis will remain in that post, while former FleetBoston CEO Charles Gifford will

become chairman of the board of directors. The enlarged bank boasts some impressive statistics,

shown in Exhibit 8. Though while statistics are impressive, they do not necessarily translate into

better performance, something investors in both banks are eager to see. Bank of America

investors in particular are concerned that the 40%+ premium paid for FleetBoston may have been

too high. The bank will need to prove to more than just shareholders that the acquisition was a

smart move. "This deal seems to be all about size and scope," said a Merrill Lynch analyst,

"although size and scope are not good justifications for the 43 percent acquisition premium that

Bank of America paid for FleetBoston . . .” 5

In order to wring efficiencies out of the newly acquired bank, Bank of America’s first

announcement was the cutting of 12,500 jobs within the company. "They feel like they have

something to prove to Wall Street to convince investors like ourselves that they didn'
t pay too

much for Fleet," said Larry Puglia, who runs a T. Rowe Price Blue Chip Growth fund and owns

Bank of America shares. "It is an unfortunate aspect of entering into large mergers like this that

there will be some job losses." 6 The bank will incur restructuring charges of $800 million but

expects to realize cost savings of $250 million in 2004 and $1.1 billion in 2005 1. Cost savings

will primarily come from the wealth management, credit cards, principal investing and marketing

areas, especially through reductions in redundant back-office operations.2

In order to provide a glimpse of what future financial performance might be, the 2003

ROE analyses for Bank of America and FleetBoston have been combined into pro forma 2004

and 2005 analyses, incorporating the restructuring costs and estimated savings mentioned above.

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These analyses are located in Exhibits 9-10. It is interesting to note that the new bank’s

combined ROE even through 2005 cannot match the performance of Bank of America in 2003.

This further assumes that the cost savings laid out can be achieved. A sensitivity analysis is

located in Exhibit 11 that reflects ROE changes based upon varying levels of cost savings. Even

at savings 150% of those estimated, the performance cannot match 2003 levels. Based on the

data presented in Exhibits 9-11, one must assume that Bank of America management believes

synergies between the combined operations will provide additional growth opportunities that will

improve performance in the future. For the short-term, however, Bank of America’s

performance will likely be hampered by merger costs and by absorbing a less profitable company

than itself.

The acquisition of FleetBoston not only achieves the stated goals of geographic

expansion, but Bank of America hopes to increase its lead in the retail banking segment and

small business lending. Additionally, the company hopes it can add to its market share in areas

of mortgage banking, credit card lending, commercial lending and asset management.7 A

comparison of each bank’s previous revenue mix and the new bank’s revenue mix is located in

Exhibit 12. The company has stated that it intends to expand into the Philadelphia and eastern

Pennsylvania area in the future, an area currently dominated by Wachovia.2

Bank of America faces significant operational risks associated with a merger of this

magnitude. "Post-merger, [Bank of America] faces a number of challenging issues

simultaneously. These include the integration issues inherent in a major merger, concurrent

business unit and management team realignments, the resolution of existing regulatory issues

and strengthening of risk management systems, and the need to achieve substantial cost savings."

Additionally, FleetBoston was in a more risky credit position than Bank of America at the time

6
of the merger, thus securities analysts have downgraded some of BOA’s debt ratings until the

merger process is completed.7

Effects on the Banking Industry

In order to secure the acquisition of FleetBoston, it was widely reported that Bank of

America had to outbid several rival banks thus driving up the cost of the purchase. BankOne,

Citigroup, Wachovia and Wells Fargo were considered potential buyers. “Fleet'
s scarcity value,

being one of the few large independent banks left in the Northeast, drove up its price. But that'
s

t occur with other targets . . . “ stated one analyst.3

a unique situation that probably won'

Following the Bank of America/FleetBoston merger announcement, analysts surmised

that a round of consolidations within the financial sector may have begun. "With the economy

recovering, credit quality on the mend, and net interest margins about to stabilize, the stage

appears set for the next round of bank M&A activity; the BofA/Fleet deal may have broken the

logjam," stated Merrill Lynch analysts.8 Just three months later, J.P. Morgan Chase announced it

would purchase BankOne (Charlotte Business Journal). Several potential targets in the industry

remain, including KeyCorp, National City, Comerica, SunTrust, PNC Financial and U.S.

Bancorp.3

Given the consolidation that has and may still occur, many question whether or not the

trend of mega-mergers is good for the banking industry. Smaller community banks, in

particular, are fearful of their future as consolidation continues and they attempt to compete with

multi-billion dollar banks down the street. One concern they have is that large banks will

petition to have a portion of the Riegle-Neal act repealed. This portion of the act prohibits bank

mergers when such a merger would create a bank controlling more than 10% of the deposits in

the U.S. Bank of America CEO Kenneth Lewis has stated that the company has no intention of

requesting a repeal. The bank is, however, permitted to grow internally past the 10% threshold.2

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 From a regulatory standpoint, is the current regulatory system sufficient to handle such

large banks? "These mergers have enormous public policy implications. First, the trillion dollar

banks that will result from these megamergers will be too big to regulate effectively," said Ken

Guenther, President of the Independent Community of Bankers. "Secondly, these banks will be

s Bank Insurance Fund." 9

too big to fail and therefore will pose a systemic risk to the FDIC'

There are also concerns as to how these large banks affect banking customers. As more

and more banks are consolidated, competition in the market dwindles and this can have an

adverse affect on deposit rates, banking fees, loan rates and customer service. Despite merging

banks’ claims that increased customer convenience and scope of services will ultimately benefit

customers, there has been little evidence to support this. Nonetheless, the Federal Reserve Board

has continued to approve megamergers and there are few signs that this trend will reverse

anytime soon.9

Conclusion

Bank of America’s acquisition of FleetBoston creates a mega-sized bank with impressive

geographic and market coverage. However, whether or not this acquisition will be profitable is

unclear. Short-term merger activities will hurt Bank of America’s performance, but long-term

growth may result. The merger appears to have started a round of consolidation in the financial

services industry as evidenced by J.P. Morgan Chase’s swift move to snap up BankOne. The

trend towards mega-consolidation has so far not been thwarted by the Federal Reserve Board.

8
Exhibits

Exhibit 1: FleetBoston ROE Analysis, 2001 10

*Ratios expressed annually

9
Exhibit 2: FleetBoston ROE Analysis, 2002 11

*Ratios expressed annually

10
Exhibit 3: FleetBoston ROE Analysis, 2003 12

*Ratios expressed annually

11
Exhibit 4: Bank of America ROE Analysis, 2001 13

*Ratios expressed annually

12
Exhibit 5: Bank of America ROE Analysis, 2002 4

*Ratios expressed annually

13
Exhibit 6: Bank of America ROE Analysis, 2003 14

*Ratios expressed annually

14
Exhibit 7: Bank of America and FleetBoston Geographic Presence 15

15
Exhibit 8: The New Bank of America: Statistical Highlights 1,16

• Banking presence in 29 states

• 9.8% of all banking deposits within the U.S.
• 5,700 retail banking offices
• 16,500 ATMs
• Largest consumer bank in the U.S. serving 33 million customers
• 9 million online banking customers
• 2.5 million business clients in the U.S. and 34 other countries
• Will serve 30% of the businesses operating in its 29-state franchise
• Though its wealth management services, it will operate the largest private bank in the
U.S. and the third-largest bank-owned brokerage
• Top small-business lender in the country
• 165,000 employees (after job cuts)

16
Exhibit 9: New Bank of America Pro Forma ROE Analysis, 2004

- This analysis uses the 2003 performance of both banks as a baseline. The 2003 balance
sheets and income statements have been combined and adjusted as follows1:
o Expensed $400 million in estimated restructuring charges (1/2 of total
restructuring charge)
o Applied estimated cost savings of $250 million

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Exhibit 10: New Bank of America Pro Forma ROE Analysis, 2005

- This analysis uses the 2003 performance of both banks as a baseline. The 2003 balance
sheets and income statements have been combined and adjusted as follows1:
o Expensed $400 million in estimated restructuring charges (1/2 of total
restructuring charge)
o Applied estimated cost savings of $1.1 billion

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Exhibit 11: New Bank of America ROE Sensitivity Analysis

ROE Sensitivity Analysis

Percent above/below estimated

20.7
150% 18.78

20.29
125%
savings

18.68 2005
19.87 BofA 2003 2004
100% 18.59 ROE

19.46
75% 18.49

19.04
50% 18.4

17 18 19 20 21 22 23
ROE

19
Exhibit 12: Bank of America and FleetBoston Revenue Mix 15

*YTD = October 27, 2003

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Cited References
1
Byrne, R. (2003). Bank of America to Acquire Fleet for $47 Billion. Retrieved April 3, 2004
from http://www.thestreet.com/markets/rebeccabyrne/10122344.html.
2
Tannenbaum, F. (2003). Deal Fits Both Banks’ Needs. Charlotte Business Journal. Retrieved
April 12, 2004 from http://charlotte.bizjournals.com/charlotte/stories/2003/10/27/daily7.html.
3
La Monica, P. (2003). Bank Earnings: Ugly But Not a Disaster. Retrieved March 22, 2004
from http://money.cnn.com/2003/01/10/pf/investing/q_fleet/.
4
Bank of America 2002 Annual Report.
5
AFP. (2003). Bank of America to Absorb FleetBoston, Creating No. 2 bank. Retrieved April
21, 2004 from http://www.taipeitimes.com/News/worldbiz/archives/2003/10/29/2003073837.
6
Reuters. (2004). Bank of America to Cut 12,500 Jobs. The Economic Times. Retrieved April
21, 2004 from http://economictimes.indiatimes.com/articleshow/602560.cms.
7
SNL Financial. (2004). Fitch Cuts Bank of America Senior Debt Ratings, Ups Fleet'
s Long,
Short, Individual Ratings. Retrieved April 22, 2004 from
http://www.snl.com/Interactive/IR/story.asp?IID=100266&NID=1641633.
8
Hannaford, S. (2003). Big Bank Merger. Oligopoly Watch. Retrieved April 22, 2004 from
http://www.oligopolywatch.com/2003/10/27.html.
9
ICBA. (2004). ICBA Expresses Concerns About Large Bank Mergers. Retrieved April 12,
2004 http://www.icba.org/news_views/news011504a.html.
10
FleetBoston 10K Report for Year Ending December 31, 2001.
11
FleetBoston 10K Report for Year Ending December 31, 2002.
12
FleetBoston 10K Report for Year Ending December 31, 2003.
13
Bank of America 2001 Annual Report.
14
Bank of America 2003 Annual Report.
15
Presentation Slides from October 27, 2003 Merger Announcement.
16
American City Business Journals. (2003). Merger Fills Void in BofA’s Footprint. Charlotte
Business Journal. Retrieved April 14, 2004 from
http://charlotte.bizjournals.com/charlotte/stories/2003/10/27/daily5.html?page=1.

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