Analysts Unsure About Bank of America-LaSalle Deal

CHARLOTTE, N.C. _ Bank of America Corp.’s $21 billion gamble on Chicago received a tepid reception Monday from some analysts and investors worried about the bank’s continued appetite for big deals.

The Charlotte-based bank confirmed an agreement to buy LaSalle Bank from Dutch parent ABN Amro Holding, which is being acquired itself by Britain’s Barclays for $91 billion. The takeover would give Bank of America the top spot in the nation’s third-biggest city and would also make it the largest player in struggling Detroit.

“While a Chicago presence might be deemed essential to a bank wishing to fill a geographic hole, we just don’t see how this adds much to the growth profile of the company,” analyst Nancy Bush of NAB Research wrote in a report Monday.

Unlike most big bank deals, Bank of America is paying cash, one of the largest transactions of this kind and a sign of the company’s mammoth size. The deal came together over a quick timeframe and competing offers could still surface.

In recent months, Chairman and CEO Ken Lewis has been emphasizing Bank of America’s efforts to expand through internal growth, while keeping his options open in Chicago, where he has only a small presence.

Executives said the deal is attractive because Bank of America can build on LaSalle’s expansive retail and business customer base by offering additional products and services. The bank also plans to slash LaSalle’s annual $2.5 billion expense base by half.

The bank wants to keep employees who work with customers, but back-office and support staff among LaSalle’s 15,000-member workforce are likely in jeopardy. Bank of America has 199,000 employees worldwide, including Chicago.

Spokesman Scott Silvestri said the company had not finalized the number of job cuts but said they would come through attrition and reductions over two years. Affected employees would be eligible to apply for open Bank of America positions, he said.

With reports of the deal breaking Sunday, the bank’s stock fell 53 cents, or about 1 percent, to $50.51 in trading Monday.

Analyst Dick Bove of Punk Ziegel & Co. called the agreement “shareholder-unfriendly,” questioning why the company would want to expand in the Midwest. The deal pushes the bank close to a 10 percent cap on total U.S. deposits that can’t be eclipsed through acquisition. That means the bank might have to shed business in attractive markets such as Charlotte to slip under the threshold, Bove said.

“These guys are meaningfully hurting organic earnings growth,” he said in an interview.

In a research report, analyst Gary Townsend of Friedman Billings Ramsey, however, said he liked the purchase, citing the addition in the Chicago market and the fact that the deal will add to earnings immediately.

Bank of America said its purchase was not contingent on ABN Amro’s sale to Barclays. Bank of America said competitors are allowed to examine the deal over the next two weeks. “We knew we had to do a full price,” Lewis said in a conference call Monday. “We knew others were lurking.”

The bank gets a $200 million breakup fee if a competitor prevails. Otherwise, the transaction needs approvals from the Federal Reserve Board and ABN Amro shareholders. The bank expects the purchase to close late this year or early next year.

The deal is part of the company’s more than two-decade march across the country, consuming banks from Dallas to San Francisco to Boston, and adding businesses from credit cards to mutual funds. This year the company jumped into the top 10 of the Fortune 500 for the first time.

Most big bank deals are done by issuing new shares of stock, but Bank of America is large enough to use extra profits accumulated over the years. At the end of the first quarter, the nation’s largest consumer bank had $80 billion in retained earnings on hand.

Using cash is advantageous because the purchase doesn’t water down the holdings of existing shareholders. That means once the deal is finalized it will immediately begin to add to earnings per share.

Using up too much cash for an acquisition, however, can worry credit rating agencies that want the bank to keep adequate levels of capital on hand. In a conference call Monday, Lewis said the bank will conserve cash for a while to get back to desired levels.

“We’ll be out of any acquisition of any size whatsoever through 2008,” he said.

The planned purchase would be the third-biggest cash takeover of a financial company and the 17th largest overall since 1990, according to Bloomberg Financial Markets data.

Most of the biggest cash deals have been announced in the last year during a binge by buyout firms. Bank of America was part of one of those deals, contributing $2.2 billion to the planned $25.4 billion acquisition of lender Sallie Mae announced last week.

In Monday’s conference call, Chief Financial Officer Joe Price said about 50 bankers examined the LaSalle purchase intensively “over the better part of last week.” That turnaround mirrors the quick trigger the bank had when buying credit card issuer MBNA Corp. and wealth manager U.S. Trust Corp. in recent years.

Bush of NAB Research said the haste wasn’t unusual, but she wished the bank had a better handle on some aspects of the transaction. For example, Lewis on Monday said he didn’t have an understanding of European laws that could affect the timing of counteroffers.

Price said Bank of America was already familiar with LaSalle after years of competition. Banks and their hired investment bankers also are constantly reviewing potential acquisition targets. “The opportunity arose, and we acted,” Lewis said.

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DEAL DETAILS

Price: $21 billion cash

Annual cost savings: $800 million after-tax

Restructuring charge: $800 million after-tax

Approvals: Federal Reserve Board and ABN Amro shareholders.

Timing: Deal expected to close late this year or early next year.

The Target: LaSalle

Assets: $113 billion in assets

U.S. Deposits: $57 billion

Employees: 15,000

Branches: 411

ATMs: 1,500

Location: Illinois, Michigan, Indiana.

The Buyer: BofA

Assets: $1.5 trillion

U.S. Deposits: $599 billion

Employees: 199,000

Branches: 5,737

ATMs: 17,117

Location: 30 states from Maine to California

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(c) 2007, The Charlotte Observer (Charlotte, N.C.).

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