Kenneth Lewis has gambled on bold acquisitions to build Bank of America into the nation's largest bank. But few of Lewis' bets match the...
Kenneth Lewis has gambled on bold acquisitions to build Bank of America into the nation’s largest bank.
But few of Lewis’ bets match the one he placed on Friday, when Bank of America announced it was buying Countrywide Financial, the mortgage giant brought to its knees by the weakening housing market and its own lax lending standards. The expected price is about $4 billion.
While that amount is relatively small, the risks to Bank of America far outweigh what the company is paying. Lewis must overcome challenges that could tarnish the Bank of America brand he has worked so hard to build, as well as his legacy.
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Chief among them will be converting Countrywide’s mortgage customers into profitable clients of other financial services. Lewis, chief of Bank of America, must also integrate two vastly different cultures, prevent or at least hedge against further declines in the value of Countrywide’s assets and soothe anxious investors — all as the housing market weakens and the economy teeters on the edge of a recession.
For Lewis, the payoff now rides on how he manages the Countrywide acquisition, which is expected to close no earlier than the third quarter of this year.
“There’s still an awful lot of meat on the bones at Countrywide, and Ken is getting it at a great price,” said Tom Brown, a hedge-fund manager and longtime critic of Bank of America. “It’s been at least a decade since I liked any of B of A’s deals. But this one may make sense.”
Lewis’ strategy has long revolved around trying to meet retail customers’ every financial need. Bank of America has almost 5,800 branches in 31 states, more than any other bank in the nation.
But the bank thinks that mortgages are the key to selling each customer more services. People who get home loans from Bank of America, according to analysts familiar with the company’s internal data, are likely to purchase an average of six other products, like credit cards and savings accounts. Other customers typically purchase only two products.
But if Bank of America is to successfully cross-sell services to the customers who have taken out 9 million loans through Countrywide, it will have to overcome cultural divides between the companies.
The aggressive business practices of Countrywide, where employees were encouraged to push borrowers into shaky loans to rake in high fees, stand in sharp relief to the friendly image that Bank of America has worked hard to project. The bank instructs its tellers to use customers’ names frequently and to think of a bank’s lobby as the “onstage” area.
“The cultural differences at these companies are staggering,” said John Kanas, who headed North Fork Bank for 35 years, before overseeing its acquisition by Capital One; he left Capital One last year. “Overcoming all of the trauma of Countrywide employees, and convincing angry Countrywide customers that this company is now kind and benevolent is going to be no small feat,” he said.
For instance, Lewis’ Bank of America will have to reach out to distressed Countrywide borrowers whose credit profiles would have qualified them for low-cost loans but were steered into expensive mortgages.
“The first thing to do is come up with an algorithm to figure out who those folks are and how to deal with them,” said Herbert Sandler, who, with his wife, Marion, founded Golden West Financial, the giant California savings and loan bought by Wachovia in 2006. “The borrowers are the ones we have to worry about.”
But Lewis has to some degree placed his own bank at risk. He must fix Countrywide while absorbing the company’s employees, seeking to cut costs and managing its still-hefty exposure to the troubled mortgage market.
On Friday, Moody’s Investors Service, the credit-rating company, said it might cut Bank of America’s financial-strength rating, currently A, in light of the acquisition.
Bank of America has stumbled over Countrywide before. The bank completed an extensive analysis of Countrywide before spending $2 billion last summer for a 16 percent stake in the lender.
Since then, Countrywide stock has plummeted by more than 60 percent. Shares of Countrywide surged by more than 70 percent Thursday after reports of the deal surfaced, but ended at $6.33 on Friday, down 18 percent from the previous day’s close.
“They’ve done a fair amount of due diligence,” said Brown, the hedge-fund manager and Bank of America critic. “But they’ve got to get their arms all the way around protecting themselves from interest-rate risk and credit risk before the deal closes. Countrywide has shown that you can’t rely on their executives.”
Finally, Lewis will have to assure skeptical investors that Bank of America can overcome all of these challenges. Shares in Bank of America fell 2 percent Friday, to $38.50, amid a broad decline in the market.
“There’s been a lot of criticism today, so Ken’s got work to do with his own investors,” Kanas said. “The merger agreement hasn’t been made public, and it’s entirely possible that it provides a lot of wiggle room for B of A, but I would expect he’s going to spend the next few weeks on airplanes convincing his institutional investors he knows what he’s doing.”
To make that case, Lewis will probably point to Bank of America’s acquisition of the credit-card giant MBNA in 2005.
At the time, that $35 billion purchase was also roundly questioned. Although the deal made Bank of America the country’s largest credit-card issuer, skeptics said it posed serious integration challenges.
The buttoned-down MBNA culture, where employees usually dressed in business attire, was a contrast to Bank of America’s casualness. Those concerns, however, proved unfounded.
“At the end of the day, this deal catapults B of A into a dominant position that puts them in contact with almost every aspect of a consumer’s financial needs,” Walter O’Haire, a senior analyst at Celent, a strategy consultant firm, said of the acquisition.
“It’s like watching professional poker,” O’Haire said. “You have to look at how they’ve played in the past, how much they’ve got in the pot, and then basically do a gut check.”
New York Times reporters Eric Dash and Gretchen Morgenson contributed to this story.