Friday, April 27, 2007

BofA Buying LaSalle? No Contest

LaSalle National Bank, which every year sponsors the Chicago Marathon, finds itself in the midst of another type of race. It's a contest to determine who will ultimately own the locally-based financial services company.
A few days ago, it looked like Bank of America was the hands-down winner. It agreed to pay a hefty $21 billion cash to buy LaSalle from Dutch-based ABN AMRO, which itself is on the selling block and the subject of a spirited takeover battle between a group of European banks. That tussle is casting doubt over who will ultimately buy LaSalle.
While the takeover battle promises to produce some great drama, I think BofA will win the day and end up owning LaSalle. Why? Because it all comes down to money and brass and BoA's CEO Kenneth Lewis has got both. He'll fight harder, and if needed, pay more for LaSalle than any of its potential suitors.
(A little background: Britain's Barclays is offering about $91 billion for ABN AMRO. The plan is to merge and produce a European banking giant. ABN AMRO management likes the sound of that and is helping pave the way for the Barclays transaction by spinning off U.S.-based LaSalle to BofA. However, a group of European banks, led by the Royal Bank of Scotland, also want ABN AMRO and are said to be preparing a higher bid this weekend.)
ABN AMRO shareholders are royally ticked at their management team for spinning off LaSalle and not waiting to get a higher bid for the entire company.
No matter. Looks like the LaSalle deed is done and BofA has the contract to prove it. (See previous LaSalle post below)
BofA rightly states that ABN AMRO management has already approved the LaSalle deal. Moreover, this is basically a private transaction between the two banks and does not require shareholders' approval, BofA adds. (The acquisition will require regulatory approval.)
What's more, BofA is already paying a sizable premium for LaSalle, nearly 21 times earnings--which is well above the 16 times earnings of similar bank acquisition transactions. What other bank is going to pay more?
JP Morgan Chase? Citicorp? Not likely.
Indeed,the Charlotte, N.C.-based BofA is so determined to make this buy that it's risking the wrath of Wall Street, which is concerned that it's paying too high a premium. Bond rating agencies are also fretting about BofA's capital reserves in the wake of this transaction.
Why is BofA's Lewis taking this risk?
Because he's a bulldog. He realizes this is his best shot at attaining a significant Midwest base in one swoop, which will quickly fill in a gaping hole between BofA's presence on the two coasts.
Left to grow on its own, BofA will need years--and alot more money-- to come close to the size of LaSalle's retail and commercial banking presence.
Will BoA have to sweeten the deal to placate shareholders? Maybe, but only at the point of a gun. More than likely it's going to insist ABN AMRO live up to its end of the LaSalle bargain.
That shouldn't be too tough. Looks like ABN AMRO management wants to sell to BofA--no matter what those cranky stockholders say.
Sure, a case can be made that ABN AMRO management is not maximizing shareholder value by spinning off LaSalle instead of keeping it and putting the entire banking concern up for bids.
But whether ABN AMRO's shareholders like it or not, their management has made the deal and BofA's Lewis has shrewdly pounced on it. If ABN AMRO walks from the LaSalle pact it must pay a $200 million penalty. That's not huge amount, in light of the billions being tossed about, but still a significant payout for nothing.
More troubling for ABN AMRO: If it attempts to wiggle out now, it will be hit by a crush of BofA-inspired lawsuits, regulatory hassles and public relations salvos.
In the short run, it may look like BofA is in danger of losing the LaSalle Bank race. But, bet on it to win this marathon.

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