Case Study
Bank of America – MBNA Merger
By Professor F. Cavico
In July of 2005, Bank of American, based in Charlotte, North Carolina, formerly the nation’s third largest bank, purchased credit card leader MBNA for $35 billion in stock and cash, making the merged company one of the largest holders of credit card debt. The merger underscored the dominance of Bank of American in consumer banking in the United States, and now makes the bank one of the world’s largest holders of consumer debt. When the deal is finally closed and approved, Bank of America will have 40 million active credit card accounts, making it one of the top credit card issuers in the nation. Moreover, in taking over MBNA, Bank of America is also buying a firm that issues credit cards for many of its rivals, including fellow Charlotte-based bank Wachovia Corporation. In 2004, in an even bigger deal, Bank of America acquired Fleet Boston Financial Corporation.
The merger will bring Bank of America’s credit card business to a level equal to such giant financial service firms as Citigroup Corp., now the nation’s largest bank, JP Morgan & Chase Company. Each of these firms will have approximately 17-20% market share of the North American credit card market. The next largest competitors will have only one third of that business. The merger is estimated to have doubled Bank of America’s credit card business. Another reason for the deal was for Bank of America to gain access to MBNA’s vaunted marketing operation, which targets credit card offers based on people’s age, income, locality, and credit rating. The deal also represents an important diversification move for Bank of America which is pressing up against a federal cap of 10% on the share of deposits that a financial institution can have in the U.S. deposit market.
In 2004, MBNA earned $2.7 billion on revenue of $12.3 billion, while Bank of America made $14.1 billion on revenue of approximately $63.3 billion. Shares of MBNA soared after the announcement of the deal, gaining over $5.00 or more than 24%, while Bank of American shares fell $1.30 or 2.7%. Under the terms of the agreement, MBNA shareholders will receive 0.5009 common shares of Bank of America plus $4.1215 in cash for each of their shares.
For Bank of American Chairman and Chief Executive Kenneth Lewis, 58 years old, a one-time credit analyst, the latest merger deal caps an extraordinary 36 year. Bruce Hammonds, president and CEO of MBNA, will become president and CEO of Bank of America Card Services. He will remain in Delaware, where MBNA is headquartered. Mr. Lewis said that the merger fits into his strategy to leverage the bank’s network of more than 5,800 branches into a chain of financial services "supermarkets" that provide everything from checking accounts and mortgages to investment advice and high-end private banking.
The merger is expected to result in 6000 job cuts, across both companies. The job cuts are expected to help Bank of America achieve overall cost savings of $850 million, which could be fully realized by 2007. Savings also will be achieved through the elimination of overlapping technology, vendor leverage, and marketing expenses.
The credit card industry is in the midst of a consolidation wave caused by the slowing growth of the industry. Although consumers increasingly use cards for purchases, they have scores to choose from. At the same time, U.S. financial institutions have been building up their credit card businesses over the last several years. The credit card business is seen as a good balance to other banking operations such as lending and retail networks. Because stand-alone credit card businesses such as MBNA do not have any sizable banking operations, they are more vulnerable to negative trends in the business.
The agreement has been approved by the boards of directors of both companies, and is subject to approval by MBNA shareholders and government regulators.
Experts in the field as well as investors expect that the deal with produce even more consolidation in the credit card and banking industries.
Sources: Nowell, Paul, "Bank of America purchases MBNA," Herald, July 1, 2005, pp. 1C, 4C; Bauerlein, Valerie, Carrns, Ann, and Sidel, Robin, "Bank of American Makes Deal For Credit-Card Issuer MBNA," Wall Street Journal, July 1, 2005, pp. A1, A5.
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