Monday, January 21, 2008

Bank of America and Countrywide

Sources: BBC, Wall Street Journal

Leading U.S. banking company, Bank of America, offered to purchase the US’s largest mortgage broker Countrywide earlier in January, for an estimated $4 billion. The recent mortgage crisis has hit Countrywide hard—Countrywide suffered a 44% drop in December, while suffering high levels of foreclosures. In August 2007, B of A invested $2 billion dollars. Countrywide shareholders will receive 0.1822 B of A shares per Countrywide share. This deal has been described as a “lifeline” for the besieged home mortgage lender, and is expected to close in the third quarter.

However, this deal has hit some snags. Details of the deal give Bank of America lots of freedom to walk away from the deal, and Countrywide’s shares dropped 10% on Friday on word that Bank of America may not complete the deal. Countrywide closed on Friday at $4.96, down from $5.48. Countrywide’s closing price on Friday was 24 percent less than the Bank of America offer prices, and now, some investment experts believe that the Countrywide deal will be renegotiated with lower share prices. Paul J. Miller Jr., an analyst at Friedman, Billings, Ramsey & Co., has stated that there may be renogiations if the mortgage market continues to fall and if Countrywide's losses exceed expectations. Neither entity has commented on the rumors.

Based on information from the public documents filed with the SEC, Bank of America has lots of room to walk away. Countrywide must have its 2007 financials audited, and there must be an "unqualified opinion" on the 2007 financials. There is also no contractual clause that would "force" Bank of America to purchase Countrywide. Furthermore, the contratual clause that allows Bank of America to walk away if there are "materially adverse changes" also gives Bank of America lots of room.

Other offers to purchase mortgage companies have already fallen through in 2007.

Question: If this deal falls through—and in light of other collapsed purchase offers for mortgage companies—what sort of impact will the general public see?

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