Bank of America Will Buy Countrywide for $4 Billion in Stock

By Mike Caggeso
Associate Editor

Bank of America Corp. (BAC) announced Friday that it will buy troubled mortgage lender Countrywide Financial Corp. (CFC) for $4 billion [about $7.16 a share] - all in stock - a deal that would make the North Carolina-based Bank of America the country's largest mortgage lender and loan provider.

The buyout comes at a time when Countrywide investors thought the stock couldn't get any cheaper [it dipped as low as $4.43 a share] this week. Countrywide hit its peak stock price of $43, Jan. 12, 2007.

Under the terms of the agreement, Countrywide shareholders will receive a .1822 share of Bank of America stock for each of their Countrywide shares.

The purchase is expected to close in the third quarter and will begin adding to earnings in 2009, the bank said in a statement.

"Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation's premier lender to consumers," said Kenneth D. Lewis, Bank of America's chairman and chief executive officer, adding that home ownership will be a key area of growth "over time."

Of course, that's reminiscent of a similar statement Lewis made in late August, when Bank of America invested $2 billion in Countrywide in exchange for convertible securities. Then, Countrywide's shares were priced around $21.

Five months later, the tightening credit market has expanded overseas and, most recently, has been fueling predictions of a 2008 recession. No one will argue that Bank of America didn't get a good price for Countrywide, but analysts will quickly point to the buyout's timing as the reason why this deal succeeds or fails.

Bank of America will inherit Countrywide's $1.5 trillion loan portfolio. After announcing the deal, Bank of America's risk of defaulting rose to its highest level since at least November 2001, Bloomberg reports. 

"We are aware of the issues within the housing and mortgage industries," Lewis said. "The transaction reflects those challenges. Mortgages will continue to be an important relationship product, and we now will have an opportunity to better serve our customers and to enhance future profitability."

It helps that Bank of America does not plan to issue subprime loans once the companies are integrated.

But given Countrywide's reputation of going nowhere but down, it's also possible that Bank of America shareholders reject the deal.

"I hope Bank of America isn't throwing good money after bad," Eric Schopf, a fund manager at Baltimore-based Hardesty Capital Management LLC, which owns 216,000 Bank of America shares, said in a Bloomberg TV interview. "They struck a deal that wasn't very attractive. Hopefully, they can get it right the second time around."

News and Related Story Links:

• Bank of America:
  Bank of America Agrees to Purchase Countrywide Financial Corp.

• Reuters: 
  Kenneth D. Lewis bio

• Money Morning:
  Countrywide CEO Still Gloomy After $2 Billion Capital Infusion

• Wall Street Journal:
  Odds of Recession Seen Rising

• Bloomberg:
  Bank of America Credit Risk Increases on Countrywide Purchase

• Bloomberg:
  Bank of America to Acquire Countrywide for $4 Billion