Business Strategy

"Bank of America and the New Financial Landscape"

By:

Group 2

Jundi Mangku Aghni

Laurentius Oktavianus

Ones Saputri

Wira Zia Akbara

ENTREE 11

School of Business and Management - MBA

Institut Teknologi Bandung

JAKARTA
1. Introduction
Histoically, Bank of America has pursued a strategy of growth through acquisition. The
strategy was evident even at the height of the financial crisis, when the bank purchaed
mortgage landing powerhouse. Like competitor, Bank america had significant problem in
late 2008 and was on the verge of collapse. The U.S federal governmenr came to its rescue,
providing $25 Billion and then an additional $20 Billion to provide protection against the
possibility of unusually large losses. Without this cash injection, Bank of America could
possibly have received the dubious distinction of being the largest bankrupcy in U.S history.
Commercial National Bank.
The foundations of the bank were laid in 1874 in Charlotte, North Carolina, wiith the
formation of Commercial National Bank. Ot growth over 85 Years. Then, in 1958, it
purchased Charlotte banking competitor American trust company and took on the new
name American Comercial Bank and continued in 1960 to purchased another local
competitor. In 1982, NCNB expanded beyond the borders of North Carolina through the
acquisition of first National Bank on Lake city in Lake Ciaty, Florida. National Bank continued
to acquisition in 1991, Bank South (1995), St. Louis Boatmens (1996), Barnett Bank (1997).
These purchases made Nations Bank the largest bank in the south, with $284 billion assets
and more than 2,600 Branches streching as far west as New Mexico.
Bank Of Italy.
Thirty years after the founding of commercial National Bank in Charlotte, Italian American
Armadeo Giannini founded Bank of Italy in San Francisco. Like Commercial Bank Bank Itlay
do the same strategy to acqusition other Bank. Gianni continued through out the 1930s and
1940s to pursue his vision of creating a national bank. Bank of America ecpanded into most
of states surronding California. Bank America faced the crisis in the mid-1980s due to
massive losses on loans made to third world nations, particularly those in Latin America.
After the 1987 stock market crash, Bank Americas stock railed storngly. In the 1994 Bank
america acquired continentallionis National Bank & Trust Co. In 1998, the acquisition of
Bank America by Nations Bank for $64.8 Billion, easily the largest bank acquisition to date.
Technically Nations Bank Purchased Bank America, The deal was structured as amerger and
resulted in the new bank holding company being named the Bank of America Corporation
and the banking subsidiary taking the name Bank of America, N. A.

Growth and Financial Meltdown in the New Millennium.

New Leadership and New Crisis. Bank america diversification strategy in 2003 is Global &
Corporate Investment Banking (24%), Asset Management (7%), and Consumer and
Commercial Banking (69%). Those potential losses were looking more and more real every
day. Begining in 2007, The US economy slid into what has been descirbed by many
economists as the most serious financial crisis since the Great Depresion.
The shadow Banks. The financial crisis had a particulary large effect on the U.S shadow
banking system.Shadow banks are nonbank financial institution that lend corporations the
capital necessary to operate, most notably through the use of commercial paper.
Several investment banks and hedge funds had significantly increased their leverage in the
ABS market in the years leading up to the financial crisis. They were therefore especially
vulnerable to ABS devaluation. These shadow institutions used funds from the sale of
commercial paper to invest in asset-backed securities, either directly or through structured
investment vehicles which they sponsored. As those securities lost value, concerns mounted
about the investment banks ability to repay their debt obligations. The result was a virtual
freezing of the commercial paper markets. To encourage lending, central banks around the
world felt they had to inject capital into their respective markets. According to Timothy
Geithner, then president of the New York Federal Reserve Bank, the size and importance of
the shadow banking system, combined with the lack of strict regulation, made the crisis
more difficult to manage.
Like its peers, brokerage house Merrill Lynch also suffered substantial losses due to
unhedged subprime mortgage exposure. Despite the removal of CEO E. Stanley ONeal for
approaching Wachovia Bank about a merger without board approval, Merrill Lynch lost
$19.2 billion between July 2007 and July 2008 (an astounding $52 million per day). New CEO
John Thain attempted to bail out the company by selling its commercial finance division to
General Electric and selling stock and select hedge. funds to Singapore investment group,
Temasek Holdings, but the bank remained near collapse. On September 15, the same day
that Lehman Brothers filed for bankruptcy, Bank of America announced its intent to
purchase Merrill Lynch for $50 billion, a 38 percent premium over current book value.

The U.S. Financial Industry after the Meltdown.

Government Ownership
The U.S. government did not see itself as a long-term investor in bank equities, which helped
to ease criticism of government ownership of financial institutions. Thus in April 2010, the
U.S. Treasury announced plans for the sale of 7.7 billion shares of common stock in
Citigroup. (It had previously exchanged its $25 billion in preferred stock for common stock at
a price of $3.25 per share.) Many similar announcements followed throughout the rest of
the year. In March 2011, after three more financial institutions repaid a total of $7.4 billion
in borrowed funds, the Treasury announced that the TARP program had turned a profit.
No More Shadows
TARP fundamentally altered the shadow banking system that had contributed so forcefully
to the financial crisis. These firms now fall under the regulation of the Federal Reserve and
therefore have a more limited exposure to risk. They are also now permitted to take
consumer deposits.
The End of The Recession
The National Bureau of Economic Research (NBER) defines a recession as a significant
decline in economic activity spread across the economy, lasting more than a few months,
normally visible in real GDP, real income, employment, industrial production, and wholesale-
retail sales. A recession begins just after the economy reaches a peak of activity and ends as
the economy reaches its trough. Between trough and peak, the economy is in an expansion.
According to the NBERs business-cycle dating committee, the peak of the most recent
recession occurred in December 2007 and concluded with a trough in June 2009, lasting for
a total of 18 months. It was the longest recession experienced by the United States since
World War II.
Banks as a Lagging Indicator
Even as other indicators showed signs of recovery, the U.S. banking sector continued to lag.
Just three banks were forced to close in 2007, compared with 25 in 2008. In 2009, an
astonishing 140 banks were shuttered, leaving the FDICs insurance fund at its lowest point
in more than 15 years. Such a large number of bank failures had not occurred since the
savings and loan crisis of the early 1990s.

Bank of America after the Crisis

Crisis Clean-Up
An April 2009 report by New York Attorney General Andrew Cuomo alleged that federal
officials, namely former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben
Bernanke, pressured CEO Ken Lewis into proceeding with the merger without disclosing
significant losses the brokerage was carrying on its books. Outraged Bank of America
shareholders also questioned the large bonus pool paid at Merrill Lynch, despite the $27.6
billion in losses incurred by the firm in 2008. The SEC also took notice and launched an
investigation to determine whether Bank of Americas management misled shareholders
prior to the December 2008 meeting in which the merger was approved. Bank of America
denied any wrongdoing but agreed to a settlement that stipulated payment of $150 million
to shareholders harmed by the disclosure violations. The bank also had to promise to adhere
for the next three years to a series of remedial actions designed to improve its corporate
governance with respect to executive compensation and financial transparency.
Executive Shakeup
The biggest change came at the end of September 2009 when CEO Lewis announced that he
would leave the company at the end of the year.37 Those close to the decision said that
Lewis had grown weary of the criticism surrounding the Merrill Lynch acquisition. Those
sources said the decision was solely Lewiss and that he was under no pressure from the
board of directors or government officials. The Merrill Lynch and Countrywide integrations
are on track and returning value already, said Lewis in his official statement. Our board of
directors and our senior management include more talent, and more diversity of talent, than
at any time in this companys history. We are in position to begin to repay the federal
governments TARP investments.
TARP funds.
Critics were a bit less optimistic, however. An analyst cited by huffingtonpost.com argued
that the timing was too soon, given the number of delinquent loans that were likely to
default in the near future. Using $26 billion in extra cash to pay back TARP funds at the same
time the Federal Reserve was in the process of withdrawing other subsidies for large banks
was also likely to leave Bank of America in a weak cash position.40 Others argued that the
payback was a mere sleight of hand designed to allow Lewis to take a victory lap before
stepping down as CEO. Bank of America continued to take advantage of low-interest loans
from the federal government that did not have any of the restrictions that TARP funds did.
Business Outlook
In 2008, analysts estimated that U.S. property owners lost $3.3 trillion in housing value and
that one in six Americans owed more than their homes were worth. In July 2009, Bank of
America reached a settlement with the Attorneys General of 40 states to start three
programs aimed at relieving homeowners financial distress. In its 2010 Annual Report, Bank
of America reported that it had modified nearly 775,000 mortgages since January 2008.
However, the Merrill Lynch acquisition was starting to look up. According to an April 2010
article in The Economist magazine, attrition at Bank of America and Merrill Lynchs
 combined investment banking operations had slowed considerably.New management that
was brought in to refresh the firm seemed to be having the desired effect. Overall the bank
earned $3.2 billion in the first quarter of 2010, driven mostly by a reduction in provisions for
credit losses and strength in the capital markets. Thus, while some things were improving,
Bank of America still had a long way to go toward full financial recovery.

2. Theoritical

Merger & Acquisition

Mergers and acquisitions (M&A) is a general term that refers to the consolidation of
companies or assets. M&A can include a number of different transactions, such as mergers,
acquisitions, consolidations, tender offers, purchase of assets and management acquisitions.
In all cases, two companies are involved. The term M&A also refers to the department at
financial institutions that deals with mergers and acquisitions.

Although they are often uttered in the same breath and used as though they were
synonymous, the terms merger and acquisition mean slightly different things.

A merger occurs when two separate entities (usually of comparable size) combine forces to
create a new, joint organization in which theoretically both are equal partners. For
example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a
new company, DaimlerChrysler, was created.

An acquisition refers to the purchase of one entity by another (usually, a smaller firm by a
larger one). A new company does not emerge from an acquisition; rather, the acquired
company, or target firm, is often consumed and ceases to exist, and its assets become part
of the acquiring company. Acquisitions sometimes called takeovers generally carry a
more negative connotation than mergers, especially if the target firm shows resistance to
being bought. For this reason, many acquiring companies refer to an acquisition as a merger
even when technically it is not.

Legally speaking, a merger requires two companies to consolidate into a new entity with a
new ownership and management structure (ostensibly with members of each firm). An
acquisition takes place when one company takes over all of the operational management
decisions of another. The more common interpretive distinction rests on whether the
transaction is friendly (merger) or hostile (acquisition).

3. Conclusion
Bank of America use the acquisition for their business strategic, in that case Bank of America
have different strategic to get their sustanable competitive advandtage. With the aquisition
their competitor Bank of America have strong advantage to sustain.