Thursday, June 30, 2005 | 9:06 a.m.
Bank of America Corp. agreed to buy MBNA Corp., the biggest stand-alone credit card issuer, for $35 billion in stock and cash as Chief Executive Kenneth Lewis raises the stakes in his rivalry with Citigroup Inc. and JPMorgan Chase & Co.
The No. 2 U.S. bank by assets will swap 0.5009 share and $4.125 for each share of MBNA in the largest financial-services acquisition since JPMorgan bought Bank One Corp. for $58 billion last year. That values MBNA shares at $27.50, or 31 percent more than yesterday's closing price. Charlotte, N.C.-based Bank of America also plans to cut 6,000 jobs after the purchase.
Lewis, 58, seized the opportunity to expand while Citigroup is barred by regulators from making big acquisitions and JPMorgan is busy digesting Bank One. His deal reshapes the U.S. credit card industry, vaulting Bank of America over American Express Co. and leaving Capital One Financial Corp. as a possible takeover target.
"You can't just do credit cards by themselves," said Nathaniel Paull, who helps manage $4.9 billion at New Amsterdam Partners in New York, including 1.7 million shares of MBNA. "You have to diversify the services you offer or merge with another company that offers those services."
MBNA shares soared as much as 27 percent after the announcement. They gained $5.31 to $26.38 in 10:23 a.m. composite trading on the New York Stock Exchange. Bank of America fell $1 cents to $45.91. The bank's bonds also weakened, with the difference between the yield on its 5.375 percent notes due in 2014 and comparable U.S. Treasuries widening 4 basis points to about 58, traders said.
Capital One shares advanced as much as 7.5 percent.
Today's announcement ends takeover speculation that picked up when a helicopter carrying MBNA CEO Bruce Hammonds and five of his top lieutenants crashed into the East River near midtown Manhattan on June 17. The executives, none of whom were hurt, were en route back to MBNA headquarters in Wilmington, Del., when the aircraft crashed.
Analysts had been sizing up MBNA as a possible target after first-quarter earnings missed estimates and the company said profit would be "significantly below" its 10 percent growth target for 2005. The twin disappointments sent MBNA's shares tumbling 17 percent.
MBNA pioneered so-called affinity marketing, in which card issuers target a group of would-be customers that share a common interest or career, such as University of Colorado graduates. JPMorgan's Bank One also offers affinity cards.
In the purchase, MBNA shareholders will get about the same price that the stock fetched in January, before the plunge.
"It's a little bit of a distressed sale," said David Hendler, an analyst at CreditSights Inc. in New York who rated MBNA's shares "attractive" because of the likelihood that the company would be bought. "Management wasn't able to surmount the challenges."
MBNA shares peaked at $28.78 in March 2004.
The company hired UBS AG and Joseph Perella, the top Wall Street dealmaker who quit Morgan Stanley in April, to negotiate the sale. MBNA's legal adviser was Wachtell Lipton Rosen & Katz.
Bank of America used Keefe, Bruyette & Woods Inc. as financial adviser and Cleary, Gottlieb, Steen & Hamilton for legal work.
"All I can say is, Hallelujah!" said New Amsterdam's Paull. "The possibility of a takeover was the one thing that kept us hanging in there."
MBNA would be the second-largest in a series of deals that transformed a former regional bank serving the southeastern United States into a nationwide rival to Citigroup and JPMorgan. Lewis, who has spent more on acquisitions that any other U.S. bank CEO in the past two years, also orchestrated Bank of America's $48 billion purchase of FleetBoston Financial Corp. in 2004.
Earlier this month, Bank of America agreed to pay $3 billion for 9 percent of China Construction Bank. Lewis moved on that purchase after talks between Citigroup and the Chinese bank stalled, people familiar with the negotiations said at the time.
Citigroup CEO Charles Prince, 55, was told in March by the U.S. Federal Reserve to delay any major takeovers so that senior management could focus on tightening internal controls. Prince has said since that he expects to start acquiring again in December.
MBNA said earlier this year earnings declined because customers paid off more debt than the company forecast, particularly on cards carrying its highest interest rates, as they turned to less-expensive sources of credit such as home- equity loans.
The company also ended a program offering zero-interest credit cards to some customers, a tactic that backfired as some cardholders defected to competitors offering the teaser rates. In response to waning demand, MBNA cut jobs and sold assets.
"I do believe that MBNA is going to make us better and we're going to make them better, and we're going to transform our marketing capabilities as a result of this transaction," Lewis said in a presentation to analysts in New York. "We will be a better marketing company because of this deal."
Bank of America said it expects to record $1.25 billion in "restructuring" costs stemming from the MBNA purchase and to save $850 million a year in combined costs by 2007.
Following the deal, Bank of America said customers will have about $143 billion in outstanding balances on its credit cards, up from $58 billion in the first quarter. MBNA CEO Bruce Hammonds, 57, will run Bank of America's card division from Wilmington.
MBNA began as the Newark, Del.-based credit card arm of MNC Financial Inc.
archive
