Bank of America on Monday said it would buy Fleet Boston in an all-share deal worth around $45bn to overtake JP Morgan as the the second-largest US bank, while becoming the largest consumer bank in the US.
Under the terms of the deal, BoA will pay 0.5553 shares per Fleet share. The ratio was derived from the share prices at the close on October 22 that gave Fleet shares an implied value of $45 and valued the transaction at almost $47bn.
Bank of America shares were trading almost 9 per cent down in New York on Monday at $74.24, from a close of $81.86 on Friday. Fleet Boston's shares rose over 25 per cent, to $39.99 from Friday's close of $31.80.
The early trading movements made Band of America's offer worth around $37.70 per Fleet share, giving the overall transaction an impled value of around $43bn.
The size of the deal far outstrips recent banking takeovers such as Chase Manhattan's $32bn takeover of JP Morgan in 2000 and First Union's purchase of Wachovia in 2001.
There has not been a larger deal since a slew of bank mergers were announced in April 1998, which included the $66bn takeover of Bank of America by NationsBank and the $82.5bn sale of Citicorp to Sandy Weill's Travelers.
BoA is known to have been looking to grow through acquisitions and had held talks with several UK banks, including Barclays, although Ken Lewis (pictured), BoA chairman and chief executive, has always maintained his focus would be on opportunities in North America.
Shares in Barclays slipped slightly in early trade on Monday after the news emerged.
Chad Gifford, Fleet chief executive, is to remain as chairman of the combined banks, while Mr Lewis will be chief executive. The board of directors will have 19 members, with 12 coming from BoA and 7 from Fleet. It will meet three times a year in Boston and five times in Charlotte, where BoA is based. Both boards have approved the deal and BoA said it was expected to close in the first quarter of 2004.
Mr Lewis said: "I am especially looking forward to working with Chad Gifford, for whom I have had a high regard over the years. Chad's strategic thinking based on his years of success and experience will be invaluable for me."
Mr Gifford appeared to have won assurances that there would be no job cuts for Fleet. Mr Lewis said: "We are proud to join forces in these new markets and will continue to be a large employer and committed corporate citizen in New England."
US banks have seen earnings surge in the past few quarters as the US recovery has picked up steam. In its recent third-quarter report, BoA said income from its consumer and commercial division had topped $2bn for the first time, helped by income in mortgage banking that more than trebled. The consumer side has been driving the bank's earnings in recent times, but it has said it wanted to reduce dependence on this by growing its corporate investment banking and asset management divisions.
Fleet, the seventh-biggest US bank, has also relied on the consumer side to help its recovery from hefty losses made in Argentina and bad loans related to Enron and the bankruptcy of United Airlines. In its most recent quarter, it said profits rose 17 per cent to $675m on the back of reduced bad debt and a pick-up in retail activity.
BoA said about 56 per cent of earnings at the combined bank would come from consumer and small business banking, about 25 per cent from corporate banking, 11 per cent from commercial banking and 8 per cent from wealth management
On Thursday, Fleet announced the purchase of Circuit City's troubled bank-affiliated credit card division for $1.3bn, which follows its 1998 deal for Advanta's consumer credit card division, bought for $12.1bn.
Fleet has grown from a mid-sized regional bank based in Rhode Island, becoming in the 1990s the largest bank in New England. It then bought BankBoston four years ago, which gave it a large national and international presence.
Bank of America was advised in the transaction by Banc of America Securities and Goldman Sachs. FleetBoston Financial was advised by Morgan Stanley.