Is BofA being brave, or does it have a real strategy?
It’s time for financial analysts around the world to go back to their drawing boards. For the recent decision of the North Carolina-based Bank of America’s (BofA) decision to purchase Countrywide Financial Corporation (CFC) for $4.1 billion in stock has totally confounded them. Many call it a foolhardy decision, for CFC incurred a loss of $1.2 billion for the quarter ending September 30, 2007. Kenneth Lewis, Chairman & CEO, BofA said in a statement, “Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation’s premier lender to consumers.” For every CFC stock, the company’s shareholders will get 0.1822 share of BofA’s stock. Last year too BofA had invested $2 billion in CFC, for a 16% stake in the company.
What’s more, the gamble might actually pay off, as banking experts consider this deal as an important one to rescue the US’s largest mortgage lender. It will also help in expanding the empire of BofA, the nation’s largest consumer bank. With the buyout, BofA can become the largest mortgage lender and loan provider in the country. Victoria Wagner Director, Financial Services Ratings Group, Standard & Poor’s told B&E, “It’s neither BofA’s decision to prevent recession or for the rescue of CFC. It’s just BofA’s interest in CFC mortgage facilities.” Bart Narter, Senior Analyst, Celent says, “There’s still plenty of risk involved... he’s (Kenneth Lewis) brave to do it. But I think that it’s very likely down the road to be profitable, maybe not immediately, but in the long term.” According to Mortgagedaily.com, close to 150 mortgage lenders failed last year and 43 were acquired by healthier institutions. But Lewis is quick to point out, “We’re aware of the issues within the housing and mortgage industries. The transaction reflects those challenges.”
It’s time for financial analysts around the world to go back to their drawing boards. For the recent decision of the North Carolina-based Bank of America’s (BofA) decision to purchase Countrywide Financial Corporation (CFC) for $4.1 billion in stock has totally confounded them. Many call it a foolhardy decision, for CFC incurred a loss of $1.2 billion for the quarter ending September 30, 2007. Kenneth Lewis, Chairman & CEO, BofA said in a statement, “Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation’s premier lender to consumers.” For every CFC stock, the company’s shareholders will get 0.1822 share of BofA’s stock. Last year too BofA had invested $2 billion in CFC, for a 16% stake in the company.
What’s more, the gamble might actually pay off, as banking experts consider this deal as an important one to rescue the US’s largest mortgage lender. It will also help in expanding the empire of BofA, the nation’s largest consumer bank. With the buyout, BofA can become the largest mortgage lender and loan provider in the country. Victoria Wagner Director, Financial Services Ratings Group, Standard & Poor’s told B&E, “It’s neither BofA’s decision to prevent recession or for the rescue of CFC. It’s just BofA’s interest in CFC mortgage facilities.” Bart Narter, Senior Analyst, Celent says, “There’s still plenty of risk involved... he’s (Kenneth Lewis) brave to do it. But I think that it’s very likely down the road to be profitable, maybe not immediately, but in the long term.” According to Mortgagedaily.com, close to 150 mortgage lenders failed last year and 43 were acquired by healthier institutions. But Lewis is quick to point out, “We’re aware of the issues within the housing and mortgage industries. The transaction reflects those challenges.”
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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