UPDATE: A sharp reader pointed to language in the Merger Agreement suggesting that the exchange ratio will be adjusted (see comments below). If so, the premise of this post–that BOFA’s disastrous equity deal is also hosing Merrill shareholders by further diluting them–is wrong. Not that Merrill shareholders aren’t getting destroyed enough by the collapse in BOFA’s stock.
EARLIER: Merrill Lynch (MER) stock has been crushed today. In fact, it’s now only $1 higher than when Bank of America “saved” it a few weeks ago. Why? Because its sugar daddy, Bank of America, just informed the market that it’s strapped.
Specifically, Bank of America murmured that its Q3 was so bad it needs to raise $10 billion. Now. Which, at last night’s closing price, meant that it would dilute its shareholders by more than 7%. This meant that, best case, Merrill Lynch shareholders would get 7% less for their company than they thought they were going to get (unless Ken Lewis adjusts the share exchange ratio, which seems unlikely).
Worse, Bank of America shareholders didn’t like this announcement, either. And they don’t want to buy $10 billion of lead-balloon BAC stock. As John Carney noted earlier, Bank of America’s bankers (Bank of America, Merrill) are having trouble shoveling all that stock out the door. And David Faber just noted (2:40ish) that the deal is only two-thirds down…at a price below $25.
Below $25! That means that the dilution is more like 10%, not 7%. No wonder Merrill Lynch stock is getting smashed.
Disclosure: Henry Blodget owns stock in Merrill Lynch.