Merrill Lynch (MER) Trading At Significant Discount to BofA Deal
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After starting the day significantly higher, Merrill Lynch (NYSE: MER) closed basically flat with Friday's close despite the announced merger with Bank of America (NYSE: BAC).
This morning, Merrill Lynch was trading as high as $22 per share as the promised $50 billion all-stock transaction with Bank of America looked like a boon to Merrill investors. But as the day progressed shares of Bank of America slipped. Since it is a stock deal, the value of the deal to Merrill shareholders is automatically tied to the rise and fall of BofA shares. BofA finished the day 21% lower as the Lehman Brothers fall-out weighed heavily of financial shares. In addition, BofA saw its credit ratings cut by S&P.
Under terms of the transaction, Bank of America will exchange .8595 shares of Bank of America common stock for each Merrill Lynch common share. Based on today's BofA close of $26.55, the value to Merrill shareholders is worth $22.82 per share. So why is Merrill trading down to $17, a 25% discount to the buyout price?
The main reason for the wide spread in the deal is fear that the deal is never consummated or re-priced. With a lot of time before the expected close of the deal in the first quarter of 2009, merger-arbitrage traders think anything can happen in this current tumultuous market.
This morning, Merrill Lynch was trading as high as $22 per share as the promised $50 billion all-stock transaction with Bank of America looked like a boon to Merrill investors. But as the day progressed shares of Bank of America slipped. Since it is a stock deal, the value of the deal to Merrill shareholders is automatically tied to the rise and fall of BofA shares. BofA finished the day 21% lower as the Lehman Brothers fall-out weighed heavily of financial shares. In addition, BofA saw its credit ratings cut by S&P.
Under terms of the transaction, Bank of America will exchange .8595 shares of Bank of America common stock for each Merrill Lynch common share. Based on today's BofA close of $26.55, the value to Merrill shareholders is worth $22.82 per share. So why is Merrill trading down to $17, a 25% discount to the buyout price?
The main reason for the wide spread in the deal is fear that the deal is never consummated or re-priced. With a lot of time before the expected close of the deal in the first quarter of 2009, merger-arbitrage traders think anything can happen in this current tumultuous market.
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