CS: Bank of America/Merrill Lynch -- A Watershed Event_SEP 15,2008

■ Bank of America announced last night that it has entered into a definitive agreement to purchase Merrill Lynch in an all-stock deal valued at $50 billion. The deal pricing of $29/shr implies 1.8 times MER’s stated tangible book value. While the premium is full given MER’s relative exposures and the overall operating environment (represents a 29% premium to MER’s common equity raise in July 2008 at $22.50/shr), we also recognize the intrinsic value of the franchise. Given a cursory look at CS’s sum-of-theparts analysis, about $27/shr of the deal price is accounted for by BlackRock stake (represents about $9/shr) and retail brokerage franchise (est. $18/shr).



■ We recognize the strategic merits of the deal, particularly given the private wealth management/retail brokerage platform and potential synergies with BAC’s retail franchise. While the risks of the transaction are high, incl. potential write-downs on MER’s remaining inventory, as well as execution risk attached to the integration of an investment bank, it’s not lost on us that BAC emerges as one of the few institutions with the wherewithal to get a transformational deal (particularly without a government backstop), such as the MER transaction done. And, while we recognize that the deal further pressures already thin capital levels, we also acknowledge that the Fed will likely continue to extend the necessary regulatory flexibility to allow BAC to raise the necessary capital in due course–which we concede has a relatively high probability of success. Additionally, we look for BAC to detail a plan for the orderly liquidation of selected MER assets, and a formal plan to address the potential means to bolster the balance sheet (i.e., capital raise/monetization of assets).