| NEW YORK
NEW YORK Bank of America Corp (BAC.N) and Merrill Lynch & Co MER.N shareholders may vote "yes" on the companies' merger because of the consequences of voting "no."
Merrill was arguably saved from extinction when it agreed to merge on September 15, an hour before Lehman Brothers Holdings Inc LEHMQ.PK filed for bankruptcy. The fear was that Merrill could be next if shareholders and trading partners fled, as many did at Lehman and the former Bear Stearns Cos.
The value of the all-stock merger had fallen by Monday to about $19 billion from an original $50 billion on concern a deep economic recession would cause credit losses to soar and require Bank of America to raise plenty of dilutive capital.
Still, Bank of America and Merrill shareholders are expected to vote on Friday morning for the merger -- at Bank of America because of the potential long-term benefits, and at Merrill because voting "no" could be a death sentence.
Merrill representatives could not immediately be reached for comment.
Merging "is more important for Merrill," said Cassandra Toroian, chief investment officer at Bell Rock Capital LLC in Paoli, Pennsylvania, which owns Bank of America shares.
"Do I wish it wasn't at this price?" she said. "Yes, but long-term shareholders recognize it's truly an opportunity."
Merrill may appear pricey after JPMorgan Chase & Co (JPM.N) paid $1.9 billion for Washington Mutual Inc's WAMUQ.PK bank assets, and Wells Fargo & Co (WFC.N) agreed to buy Wachovia Corp WB.N, valued Monday at $10.1 billion.
But the merger has already won the blessings of the U.S. Federal Reserve and major shareholder advisers. Bank of America must hold a vote because Merrill shareholders would own close to one-fourth of the bank. A closing is expected this month.
Adding Merrill would lift Charlotte, North Carolina-based Bank of America above JPMorgan and Citigroup Inc (C.N) as the largest U.S. bank by assets.
Bank of America would have the largest U.S. retail bank and brokerage, and one of the world's largest wealth managers and investment banks. It expects $7 billion of annual cost savings, but has not said where. CNBC television said on Monday that the merged entity could cut 10,000 jobs, mostly from Merrill.
Both companies have declined to detail expected cost cuts.
Merrill shareholders would receive 0.8595 of a Bank of America share for each of their shares. As of Monday's close, Merrill shares traded at an 8.3 percent discount to the price implied by Bank of America's offer, suggesting that some investors still believe the merger will not happen. That spread, however, was more than twice as large two months ago.
Since becoming Bank of America's chief in 2001, Kenneth Lewis has integrated several purchases, including FleetBoston Financial Corp, MBNA Corp and LaSalle Bank Corp.
Yet investors worry that with the U.S. economy in recession he is biting off too much, even with a $25 billion infusion from the government's financial industry bailout.
In July, Bank of America bought Countrywide Financial Corp, adding exposure to a sinking housing market that is nowhere near a bottom. Merrill meanwhile as of September 26 had more than $72 billion of mortgage exposure, including $39.6 billion to residential loans and $15.7 billion to commercial real estate.
Credit issues lurk elsewhere. Bank of America's credit card unit had a third-quarter loss, and Lewis said on November 18 the card industry may face its highest losses ever.
Keeping Merrill's 17,000 brokers happy is critical, although Merrill said in November it expects most will stay.
Lewis called Merrill's brokerage "the crown jewel" in the merger. Merrill chief John Thain was named to run the combined company's investment banking and wealth-management businesses.
"The franchise is going to be very formidable," said Michael Nix, a portfolio manager at Greenwood Capital Associates LLC in Greenwood, South Carolina.
Merrill shareholders will likely support the merger overwhelmingly. In endorsing the merger, the advisory firm Proxy Governance Inc harkened to the fates of Lehman and Bear.
"As both Lehman Brothers and Bear Stearns tragically demonstrate, a crisis of confidence can rapidly escalate into a vicious circle of plummeting share price and worsening liquidity and capital strength," it said.
(Editing by Matthew Lewis)