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In January, Bank of America (NYSE: BAC) made a gutsy move when it decided to purchase Countrywide Financial (NYSE: CFC). True, it would greatly expand its mortgage footprint, but it would also mean taking on lots of risk.
Of course, since then, the financials went into a swoon. In fact, the US financial system almost imploded because of the Bear Stearns (NYSE: BSC) debacle.
As a result, there is much skepticism that Bank of America will close its deal, as evident by remarks from an analyst with Friedman, Billings, Ramsey & Co. – Paul Miller – who thinks that Bank of America should forgo the deal.
His belief is that there will be a need for a whopping $30 billion writedown, which would be tough to swallow for Bank of America's shareholders.
Interestingly enough, there are already signs that Bank of America is getting skittish. Last week, the firm was not clear that it would back Countrywide's debt. The upshot was that S&P downgraded the debt to junk status.
And yes, in today's trading, Countrywide's stock is down 10% to $5.35.
Tom Taulli is the author of various books, including The Complete M&A Handbook
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Reader Comments (Page 1 of 1)
5-05-2008 @ 12:35PM
David Huston said...
Normally, if you buy the business, you buy the debts; on the other hand, if it's merely an asset purchase (you buy the leased facilities, the staplers, the reams of paper, etc.), the debts remain with the seller, and the creditors are left without assets to pursue to recover a (tiny) portion of their outstanding debt. Likewise, the stockholders, common and preferred, are left with nothing. Query how this deal can work?