BofA-Merrill Settlement Disappoints - Analyst Blog


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Investors in Delaware are unhappy with the $20 million settlement price offered by Bank of America Corp. ( BAC ) to reconcile the lawsuits filed against it by its shareholders in relation with the acquisition of Merrill Lynch & Co. As reported by Bloomberg , the settlement price represents merely 4% of the insurance coverage provided to the Board of Directors.

The lawyers representing BofA's shareholders in Delaware alleged that the settlement proposed by the bank is highly inadequate. It signifies just a fraction of the $5 billion claim that the Delware's derivative plaintiffs have been looking for.

A Federal Judge in New York is contemplating the settlement suggested by BofA in connection with all the similar lawsuits filed by the investors, but the Delaware investors are against this meager settlement and want to keep their case open. They believe that the bank is trying to settle the case in order to evade the hearing in Delaware court in October.

The lawsuit, in lieu of which the settlement was offered, claimed that the consideration paid by BofA for the acquisition of Merrill was in excess of the required amount. In addition, the lawsuit accused BofA along with some of its senior managers and directors of deliberately concealing the amount of Merrill's losses and bonus payouts in 2008.

Moreover, BofA was forced in January 2009 to take a second bailout from the Troubled Asset Relief Program (TARP) due to Merrill losses. This led to a 93% drop in the bank's stock price. The acquisition of Merrill turned sour, which compelled the shareholders to take legal action.

Earlier, in 2009, the Securities and Exchange Commission (SEC) had also charged a fine of $150 million on BofA based on similar issues.

Our Take

The increasing number of lawsuits on BofA can result in tainted goodwill and elevated litigation costs, which will have a negative effect on its profitability.

Currently, the shares of BofA have a Zacks #3 Rank, which translates into a short-term Hold rating. Additionally, we maintain our long-term Neutral recommendation on the stock.

Similarly, one of the peers of BofA, Wells Fargo & Co. ( WFC ) also retains a Zacks #3 Rank.

BANK OF AMER CP ( BAC ): Free Stock Analysis Report
WELLS FARGO-NEW ( WFC ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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