Bank of America and Merrill Lynch
Bank of America and Merrill Lynch Business Combinations: Dissolution of all but one of the separate legal entities is not necessary in order to have a business combination. A business combination is created when a number of separate organizations are tied together through common control, or an acquirer obtains control over one or more businesses. Statutory merger: any business combination in which only one of the companies remains as a “survivor” or “parent”. Statutory consolidation: a business combination in which two or more companies create a new separate entity. The original entities may or may not dissolve in such combination.
Goodwill is an asset representing the future economic benefits arising in a business combination that are not individually identified and separately recognized. Goodwill does not affect net income. Rather, the acquirer recognizes it as an asset. Bargain purchase is the fair value of the net assets acquired in excess of the consideration transferred in a business combination. In a bargain purchase situation the net asset fair value is the valuation basis for the combination and the parent company recognizes a gain in its income statement in the period the acquisition takes place.
The parent will record the assets acquired and liabilities assumed in their fair market value and will credit the “Gain on Bargain Purchase” account. Bank of America and Merrill Lynch Bank of America completed the acquisition of Merrill Lynch on 1/1/09. Acquisition took place in exchange for common and preferred stock valued at $29. 1 billion. Bank of America also acquired Countrywide Financial, a mortgage servicing company, in 2008. Bank of America is a retail bank, a credit card company, and a retail lender. Merrill Lynch is an investment bank and a wealth management and brokerage firm.
The two companies did not have a large overlap in services; however, since both are in same industry, the merger that took place is horizontal merger. A. Net Accounts Receivable- the merger had an impact on “Average Loans and Leases” rather than on “Year End Loans and Leases” account as specified in the accompanying notes of the report. Year-end loans and leases decreased $31. 3 billion primarily due to lower commercial loans as the result of customer payments and reduced demand, lower customer merger and acquisition activity.
However, “Average loans and leases increased $37. 9 billion to $948. 8 billion in 2009 compared to 2008 primarily due to the addition of Merrill Lynch, and the full-year impact of Countrywide. ” B. Inventories, or “Federal Funds Sold and Securities Borrowed or Purchased Under Agreements to Resell” account- Federal funds transactions involve lending reserve balances on a short term basis. Securities borrowed and securities purchased under agreements to resell are utilized to accommodate customer transactions, earn interest rate spreads and obtain securities for settlement.
The year-end and average account balances increased $107. 5 billion and $107. 7 billion in 2009 primarily due to the acquisition of Merrill Lynch. C. Long Term Assets- Trading account assets: 2009 Year-end and average trading account assets increased $47. 9 billion and $30. 5 billion in 2009, attributable primarily to the acquisition of Merrill Lynch. The year-end and average balances of debt securities increased $33. 9 billion and $20. 5 billion from 2008 due to net purchases of securities and the impact of the acquisition of Merrill Lynch. D.
Accounts Payable- the Merrill Lynch acquisition attributed to an increase in the following account: “Federal Funds Purchased and Securities Loaned or Sold Under Agreements to Repurchase” These are collateralized financing transactions utilized to accommodate customer transactions, earn interest rate spreads and finance inventory positions. 2009 year-end and average balances increased $48. 6 billion and $96. 9 billion. E. Long Term Debt- Year-end and average long-term debt increased $170. 2 billion to $438. 5 billion and $215. 4 billion to $446. billion in 2009 compared to 2008. The increases were attributable to issuances and the addition of long term debt associated with the Merrill Lynch acquisition. F. A statutory merger took place and Merrill Lynch ceased to exist as a separate entity. Merrill Lynch became the wealth management division of Bank of America. Bank of America accounted for the acquisition in consolidated financial statements and accompanying notes. G. Cost of merger: $29. 1 billion. Cost allocations: Common stock acquired: $19. 4 billion; preferred stock acquired $8. billion; fair value of outstanding employee stock awards $1. 1 billion. Bank of America recorded $5. 4 billion of goodwill from the combination. Total purchase price $29. 1 Allocation of the purchase price: Merrill Lynch stockholder’s equity 19. 9 Merrill Lynch goodwill and intangible assets(2. 6) Pretax adjustments to reflect acquired assets and liabilities fair value: Securities (0. 9) Loans (5. 0) Intangible asset5. 8 Other assets/ liabilities (4. 8) Long term debt 15. 5 ____ Pretax total adjustments 10. 6 Deferred income taxes (4. 2) ____
After- tax total adjustments 6. 4 Fair value of net assets acquired 23. 7 ____ Good will resulting from Merrill Lynch acquisition $5. 4 | | H. In Process R&D- Not found, Intangible Assets: Consist of trade name of $1. 3 billion and customer relationship and core deposit intangibles of $4. 5 billion. The amortization life is 10 years for the customer relationship and core deposit intangibles which will be primarily amortized on a straight-line basis. | | I. Acquired contingencies: The fair value of net assets acquired includes certain contingent liabilities that were recorded as of the acquisition date. Merrill Lynch has been named as a defendant in various pending legal actions and proceedings arising in connection with its activities as a global diversified financial services institution.
Some of these legal actions and proceedings include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Merrill Lynch is also involved in investigations and/or proceedings by governmental and self-regulatory agencies. Due to the number of variables and assumptions involved in assessing the possible outcome of these legal actions, sufficient information did not exist to reasonably estimate the fair value of these contingent liabilities.
As such, these contingences have been measured in accordance with accounting guidance on contingencies which states that a loss is recognized when it is probable of occurring and the loss amount can be reasonably estimated. In connection with the Merrill Lynch acquisition, on January 1, 2009, the Corporation recorded certain guarantees, primarily standby liquidity facilities and letters of credit, with a fair value of approximately $1 billion.
At the time of acquisition, the maximum amount that could be drawn from these guarantees was approximately $20 billion. In a business combination that arises from a contingency: J. Acquirer’s journal entry: Stock acquired$17. 3 Intangible Assets$5. 8 Non- Current Assets$15. 5 Goodwill$5. 4 Common Stock Issued$19. 4 Preferred Stock Issued$8. 6 Outstanding employee stock awards$1. 1 Loans and Securities$5. 9 Deferred Income Taxes$4. 2 Other Assets/ Liabilities$4. 8
