The Need for Due Diligence and Financial Statement Analysis – The Bank of America-Merrill Lynch Case

Abstract

Mr. Ken Lewis, Chief Executive of Bank of America (BOA), was harshly questioned regarding BOA’s acquisition of Merrill Lynch. This was driven by an earnings release on January 16, 2009 indicating Bank of America had massive losses for the 4th quarter of 2008 due to the Merrill Lynch acquisition. Bank of America’s stock fell to $7.18, its lowest level in 17 years following the release of the earnings announcement. Complicating the matter was that the market capitalization of Bank of America, including Merrill Lynch, was just $45 billion, and Bank of American had offered $50 billion to acquire Merrill.

These events led both insiders and outsiders to question the acquisition. What due diligence should have been completed and were there were relevant accounting policies and valuation issues of concern? In this case, students are placed in a decision-making role to provide a financial analysis considering different options and assessing the benefits and detriments of the acquisition. It provides students an opportunity to apply acquisition principles in a real-life setting.