B of A cut Countrywide price after learning of loss

By Jonathan Stempel

BANGALORE (Reuters) - Bank of America Corp (BAC.N), which agreed to buy Countrywide Financial Corp CFC.N for $4 billion, said it once considered paying 39 percent more per share, but cut the price after learning the largest U.S. mortgage lender was facing a likely fourth-quarter loss.

According to a regulatory filing, Countrywide management told Bank of America in early January that tough market conditions were "putting increasing pressure on Countrywide's financial condition and would, in management's estimation, likely result in a loss for the fourth quarter of 2007."

That projection followed a meeting on December 28 in which Bank of America set forth a "preliminary illustrative transaction scenario" under which it would offer Countrywide shareholders 0.2353 of a share for each of their shares, or $9.96 per share, a 10 percent premium.

But at that same meeting, according to the filing, Countrywide disclosed it had just learned of problems in some home equity loan securitizations, prompting Bank of America to suggest it needed to examine the issue further.

Countrywide eventually agreed to the issuance of 0.1822 of a Bank of America share for each Countrywide share, valuing the Calabasas, California-based lender at $7.16 per share.

On Oct 26, Countrywide told investors it expected a fourth- quarter profit of 25 cents to 75 cents per share. It did not update that forecast prior to reporting a fourth-quarter loss of $421.9 million, or 79 cents per share, on January 29.

"Countrywide, as a publicly traded company, has an obligation to disclosure material information. But it can't pick-and-choose who it discloses to," said Eric Chiappinelli, associate dean at Seattle University School of Law and a specialist in corporate acquisitions and securities regulation.

"Probably the disclosure was meant not to get Bank of America to trade on the information, but to put all of Countrywide's cards on the table, so the merger would go through and Bank of America would know what it's buying. If I were a shareholder, I might be disgruntled, but not surprised, because there might have been enough information out there to indicate problems with Countrywide's profitability."

A Countrywide spokesman declined immediate comment. A spokesman for Charlotte, North Carolina-based Bank of America referred questions to Countrywide.

By the time Countrywide reported fourth-quarter results, analysts on average expected a 32 cent per share loss. Countrywide lost another $893.1 million in the first quarter.

Countrywide shareholders are slated to vote on the merger on June 25. A closing is expected early in the third quarter.

Bank of America shares closed 73 cents higher at $34.60, while Countrywide shares were up 41 cents at $5.39.

Countrywide shares have long traded at a discount to where they should based on the exchange ratio, reflecting investor concern that Bank of America might not complete the merger at the original price.

(Editing by Andre Grenon)