A Play for Wall Street
Merrill Lynch Deal Is Ultimate Test of Bank's Ambition

By Binyamin Appelbaum
Washington Post Staff Writer
Tuesday, September 16, 2008

Kenneth D. Lewis, who buys banks for a living, rarely shows emotion on the days spent announcing purchases by his company, Bank of America.

Yesterday, announcing a deal to buy Merrill Lynch for $50 billion, he flickered only once, after an analyst asked about his company's ability to cut costs.

"We're good at this," he said with a touch of exasperation. "This isn't our first time."

Bank of America, which Lewis has run since 2001, has in recent years become the most comprehensive financial company in the United States, buying rivals including FleetBoston Financial, MBNA and Countrywide Financial. But the Charlotte company has struggled to attain the high profile to match its outsize profits.

With the deal for Merrill Lynch, Bank of America would become the nation's largest retail brokerage and a major player on Wall Street. It is already the nation's largest retail bank, the largest credit card issuer, the largest mortgage lender -- and in many cities across America, the largest presence on the skyline.

Bank of America was in a position to make the acquisition because, until now, it had not been active on Wall Street, where Merrill and other firms have been battered by severe troubles in mortgage-related securities. Instead, it set its sights on consumers, which gave it cash to go shopping for an investment bank.

The Merrill buyout also may close a chapter for Bank of America. Lewis said yesterday that he thought it might be his last deal. He turned 61 in April. He has spent $75 billion on deals in the past twelve months. He has now staked his legacy on his ability over the next few years to assemble from those pieces a single, highly profitable company.

"His swan song is going to be integrating and pulling together these businesses. If you can do that, then what do you do for an encore? Nothing," said Tony Plath, a finance professor at the University of North Carolina at Charlotte who has followed the company and Lewis over the years. "This will be his legacy."

Lewis grew up in Mississippi, then followed the well-worn road to Atlanta, where he worked to pay for tuition at Georgia State University. Later, he took a gamble, moving to Charlotte to take a job with North Carolina National Bank. Years later, Lewis would say that he considered the company a good fit because it had big ambitions. He would also say that he had always aspired to be in charge someday.

He climbed through the ranks as the bank exploded across state lines, building one of the first regional franchises. Under Hugh McColl, an ex-Marine, the bank bluffed and bullied its way past larger rivals to buy banks in Atlanta and Richmond and then in Texas and Florida.

And then, in 1998, it bought BankAmerica, the San Francisco bank that once had been the largest in America. That crown now belonged in Charlotte, and the company, then called NationsBank, took a new name to celebrate: Bank of America.

Lewis served McColl as a senior lieutenant, then succeeded him in 2001. McColl was brash, exuberant, pleased by the spotlight. Lewis is reserved, patient when necessary, efficient when speaking in public. His initial mandate was simple: The Marine had conquered an empire. Now it needed to be hammered and trimmed into a profitable business. For five years, Lewis focused single-mindedly on that task.

Then he continued the expansion, taking the company beyond the Sun Belt. In 2004, he paid $47 billion for the largest bank in New England, FleetBoston Financial. He then expanded on Fleet's modest footprint in New York City. Last year, he paid $21 billion for LaSalle Bank of Chicago, giving Bank of America a presence in each of the nation's 10 largest metropolitan areas.

The initial goal of the expansion was to insulate the company against geographic economic downturns. But in the long run, the most important consequence was that Bank of America created an unparalleled system for sucking up deposits from every corner of the country.

In recent years, that deposit base has put Bank of America in the position of a power company that doesn't have enough customers for its electricity. The bank needed more borrowers. So it bought MBNA to become the nation's largest credit card lender. It bought Countrywide Financial, another firm enfeebled by the credit crisis, to become the nation's largest mortgage lender. And now it has agreed to buy Merrill Lynch in the hope of selling loans to its brokerage customers.

This deal also would give Bank of America a better balance of revenue sources. Merrill Lynch makes much of its money from fees charged to people for whom it manages funds and to corporations for whom its investment bank raises money. Bank of America's revenue is still tilted toward its lending business.

The Merrill Lynch purchase has all the hallmarks of a Ken Lewis deal. The target dominates its niche. When it stumbles, Bank of America moves fast and decisively, closing the deal in a weekend. Finally, the purchase is certain to cost the bank some money in the short term, but there is a good chance that it will be hugely profitable in a few years.

"Ken Lewis is a strategic thinker," said Steve Bartlett, president of the Financial Services Roundtable. Lewis is a member of the group. "He's always thinking two to five years in the future. If this were about next week, he perhaps would not have done it."

The bank's share price fell 21 percent yesterday to close at 26.55 in trading on the New York Stock Exchange.

As is often the case with Lewis's deals, some financial analysts have said Bank of America is paying too much. They suggest that Merrill Lynch could have been forced to sell for a lower price. But Bank of America has rarely pushed to close deals at the lowest possible price. Instead, it makes money in the aftermath. The bank is expert at cutting costs, slicing at acquisitions until they match Bank of America's lean infrastructure. It is also very good at increasing revenue.

In this case, as in past deals, Lewis will try to sell Merrill Lynch's products and financial services to Bank of America's vast network of existing customers. And vice versa. Lewis, asked about retaining Merrill Lynch's "thundering herd" of financial advisers, said he could simply promise he would be sending them a lot of new customers.

The company's plans on Wall Street are less clear. Bank of America has failed in past attempts, partly because investment banks rely on highly paid superstars, while Bank of America's culture frowns on the very notion of individual responsibility for successes. The company has been known to tell reporters that it is not possible to identify a person responsible for a new product or idea and certainly not possible to interview them.

Lewis recounted the makings of the deal in his usual laconic style on CNBC yesterday. He said he had been contacted by John A. Thain, the chief executive of Merrill Lynch.

"He called early Saturday and said, 'Do you think it might be time to talk?'

"And I said, 'Yeah.' "

Later, speaking about the deal in public for the third time, he added a rare moment of personal reflection. "I don't know if I'll get to do another acquisition during my career."

Special correspondent Heather Landy in New York contributed to this report.