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Bank of America Agrees to Buy MBNA for $35 Billion (Update2)

Bank of America Agrees to Buy MBNA for $35 Billion

June 30 (Bloomberg) -- Bank of America Corp., the second- largest U.S. bank by assets, agreed to buy MBNA Corp. for about $35 billion in stock and cash to challenge Citigroup Inc. and JPMorgan Chase & Co. in credit cards.

Bank of America will swap 0.5009 share and $4.125 for each share of Wilmington, Delaware-based MBNA in the second-largest acquisition this year. That values MBNA at $27.50 a share, or 31 percent more than its closing price yesterday. Charlotte, North Carolina-based Bank of America plans to cut 6,000 jobs after the purchase, it said in a statement today.

Bank of America Chief Executive Officer Kenneth Lewis, 58, seized the opportunity to expand while Citigroup is barred by regulators from making big acquisitions and JPMorgan is busy digesting last year's $58 billion purchase of Bank One Corp. His purchase of MBNA reshapes the U.S. credit card industry by eliminating the largest non-bank issuer and vaulting Bank of America over American Express Co.

``You can't just do credit cards by themselves,'' Nathaniel Paull, who helps manage $4.9 billion at New Amsterdam Partners in New York, including 1.7 million shares of MBNA. ``You have to diversify the services you offer or merge with another company that offers those services.''

The acquisition will pay MBNA shareholders about the same price that the stock fetched in January, before it tumbled. MBNA hasn't recovered from a 17 percent plunge on April 21, when first-quarter earnings missed analysts' estimates and the company said profit would be ``significantly below'' its 10 percent growth target for 2005.

`Distressed Sale'

``It's a little bit of a distressed sale,'' said David Hendler, an analyst at CreditSights Inc. in New York who rated MBNA's shares ``attractive'' because of the likelihood that the company would be bought. ``Management wasn't able to surmount the challenges.''

The stock has dropped from a peak of $28.78 in March 2004 to $21.07. It fell 23 cents in composite trading on the New York Stock Exchange yesterday.

MBNA said earlier this year that customers have been paying off more debt than the company had forecast, particularly on cards carrying MBNA's highest interest rates, favoring less- expensive sources of credit such as home-equity loans.

MBNA also ended a program offering zero-interest credit cards to some customers, a tactic that backfired as some cardholders defected to competitors offering the teaser rates. In response to waning demand, MBNA cut jobs and sold assets.

Costs, Savings

Bank of America said it expects to record $1.25 billion in ``restructuring'' costs stemming from the MBNA purchase and save $850 million a year in combined costs by 2007.

Following the deal, Bank of America said customers will have about $143 billion in outstanding balances on its credit cards, up from $58 billion in the first quarter. MBNA CEO Bruce Hammonds, 57, will run Bank of America's card division from Wilmington.

MBNA began as the Newark, Delaware-based credit card arm of MNC Financial Inc., a company NationsBank Corp. acquired in 1994. NationsBank changed its name to Bank of America Corp. in 1998.

Charles Cawley, who ran the card division, in 1982 persuaded his alma mater, Georgetown University, to endorse MBNA's cards in exchange for a cut of revenue generated from the school's alumni. The agreement marked the birth of so-called affinity marketing, in which companies target a group of would- be customers that share a common interest or career.

MBNA Goes Independent

Facing mounting debt, MNC Financial hired shareholder Alfred Lerner in 1990 to orchestrate a turnaround. Lerner wanted to sell MBNA to raise cash for MNC. Unable to reach a deal, he took the business public in January 1991, making it the first independent credit-card issuer, and named himself its chief executive.

Lerner, who later bought the Cleveland Browns U.S. football team, died in 2002 from brain cancer. Cawley, then president, was named his replacement.

Cawley retired in November 2003 after MBNA directors cut top managers' pay, canceled an executive retreat in Maine and sold artwork, yachts and jets. He was succeeded by Hammonds, who had run the company's biggest division.

Hammonds and five of his top lieutenants were on board a Sikorksky S76C helicopter on June 17, en route from New York to MBNA's headquarters in Wilmington, when the aircraft crashed into the East River near midtown Manhattan. None of the executives was injured in the crash.

MBNA spokesman Jim Donahue said Hammonds and his team were in New York for a business meeting, fueling speculation among investment bankers that the company was considering a sale or acquisition.

(To hear Bank of America's press conference to discuss the MBNA purchase at 11 a.m., see {LIVE <GO>}.)

To contact the reporters on this story:
George Stein in New York at [e-mail]


LINK: http://www.bloomberg.com/apps/news?pid=10000087&sid=aQC7bhrD3VGo&refer=top_world_news