Acquisition of Merrill Lynch by Bank of America

Bank of America has been making major acquisitions every year to solidify its holdings and to stay ahead of the race against other commercial banks like J.P. Morgan and Wells Fargo & Co.

In 2004, it acquired FleetBoston Financial, which strengthened its position as the bank with the largest FDIC-rated deposit market share in the U.S. This left J.P. Morgan (second in line) way behind in the ranking. In 2005, it acquired MBNA, which made Bank of America the leading credit card issuer globally. In 2006, Bank of America acquired the U.S. Trust Company. In 2007, Bank of America acquired ABN AMRO North America and LaSalle Bank Corporation which made it the leading bank in the Northeast and Midwest markets. On July 1, 2008, Bank of America officially acquired Countrywide Financial Corporation, which makes the bank the controller of 25% of the home loan market. And now it acquired Merrill Lynch & Co.

J.P. Morgan has always been the leading contender of Bank of America when it comes to commercial banking. Since Bear Stearns Co. was bought out by J.P. Morgan for only $2 a share, I wonder if one of the reasons for Bank of America to acquire Merrill Lynch & Co. is to maintain its position against J.P. Morgan. Acquisition of Merrill Lynch now makes Bank of America the largest financial services business in the world and also allows access for Bank of America to engage with emerging markets outside the U.S. such as India.

So, is it presently more beneficial to be a commercial bank like Bank of America and J.P Morgan, or to be an investment firm? Following the acquisition of Bears Stearns, the Federal Reserve made a cut in its discount rate (the rate at which banks borrow money from the Fed) from 3.50% to 3.25%. The collapse of Lehman Brothers and acquisition of Merrill Lynch would further heighten the anxiety in U.S. financial markets, and could worsen the credit crunch.

Goldman Sachs and Morgan Stanley are now the only two remaining independent broke-dealers left in the country. With the bankruptcy of Lehman Brothers, and the acquisition of renowned independent firms like Bear Stearns Co. by J.P. Morgan and Merrill Lynch by Bank of America, it will be interesting to see how Goldman Sachs and Morgan Stanley hold up this year.