Bank of America Corp. on Thursday said it will acquire MBNA Corp. in a $35 billion cash and stock deal that will result in 6,000 jobs cuts but transform the nation’s third-largest bank into one of the world’s largest credit card issuers.
MBNA President and CEO Bruce L. Hammonds, 57, will become CEO and president of Bank of America Card Services and report to Liam E. McGee, 50, president of Bank of America global consumer and small business banking. Hammonds will remain in Wilmington, Del., where MBNA is headquartered, and be part of Bank of America’s risk and capital committee.
Frank P. Bramble, Sr., a vice chairman of MBNA, will be appointed to the Bank of America’s board of directors.
Bank of America said the acquisition is an opportunity to grow a business that has proven to be one of its fastest growing segments.
“For years, I have been impressed with the sales capabilities of MBNA,” Ken Lewis, Bank of America’s chairman and chief executive, told a group of industry analysts after the deal was announced. “I see them as a selling machine.
“We think the strategies complement each other. We have the franchises and they have marketing savvy.”
After the deal is completed, Bank of America will have 40 million active credit card accounts, making it one of the leading worldwide payments-services companies and issuers of credit, debit and prepaid cards based on total purchase volume, Lewis said.
Deal ‘not a shocker’
The deal is a pricey one for Charlotte-based Bank of America, but “not a shocker,” said Andrew Collins, an analyst at Piper Jaffray in New York. Lewis has been talking about buying a company offering credit cards based on the prime rate for a while, Collins said, and “there’s only one of them left.”
“They are going to make this as seamless as possible for MBNA customers,” Collins said. “And they will get more banking services as this goes forward because Bank of America has more products.”
The merger also gives MBNA a more powerful distribution channel, Hammonds told analysts.
“We can solicit (nationally) through the mail, but we don’t have personal contact with potential customers,” he said. “Bank of America has that contact.”
Collins said he liked the price, even though he called it a little high.
“It’s not cheap, but the earnings prospects look pretty good,” he said. MBNA earned $2.7 billion on revenue of $12.3 billion in 2004.
The deal is expected to close in the fourth quarter of 2005. Under terms of the agreement, MBNA shareholders will receive 0.5009 common shares of Bank of America plus $4.125 in cash for each of their shares. Based on Bank of America’s Wednesday closing stock price, the deal values MBNA at $27.50 per share, a 31 percent premium to their Wednesday closing price of $21.07.
After the announcement, NYSE-listed shares of MBNA surged on the New York Stock Exchange. Shares of Bank of America fell.
Job cuts to save costs
Bank of America expects the job cuts to help it achieve overall cost savings of $850 million, which would be fully realized in 2007, and anticipates a restructuring charge of $1.25 billion. Savings also will be achieved through the elimination of overlapping technology, vendor leverage and marketing expenses.
Bank of America said the agreement has been approved by both boards of directors and is subject to approval by regulators and MBNA shareholders.
The company said about 55 percent of the combined company’s earnings will come from global consumer and small business banking, 17 percent from global business and financial services, 11 percent from global capital markets and investment banking and 10 percent from global wealth and investment management.
“For our shareholders, the Bank of America and MBNA combination yields a diverse business mix less dependent on market-sensitive businesses,” said Lewis. “The financial strength and cash flow generation of the combined entity should provide significant resources to support future growth.”
The deal comes nearly a year after the Federal Reserve cleared the way for financial services powerhouse J.P. Morgan Chase & Co. to combine with Chicago-based Bank One Corp., forming the nation’s second-largest bank with more than $1 trillion in assets.
Bank One, with branches in 13 Midwest and Southwest states and in Florida, has $320 billion in assets and over 51 million credit cards issued.
Meanwhile, Morgan Stanley is reportedly proposing a spin-off of its credit-card business, Discover Financial Services.