BAC/CFC Update

I wrote back in January to give my opinion on the Bank of America/Countrywide buyout. Actually, I didn't give much of an opinion but rather my analysis and conclusion that the deal may not go through.

Bank of America offered BAC stock to shareholders of CFC. So its a no cash deal (partly because BofA has already invested over $2b in cash over the last year). Since stock prices are always changing I thought I'd revisit the deal, update the value BofA is placing on Countrywide, and see if the market has changed it's opinion on the transaction.

Last month I noted a $1.2b gap between the markets value of CFC and BofA's offer. Since my write up BAC is up 15.4% and CFC is up 26.8%. At 0.1822 shares of BAC for every 1 share of CFC, BofA is now valuing Countrywide at $4.5b (market close 2-22-08).

Despite the great increase in CFC stock price over the last month and a half, the market is still valuing CFC $500m less than BofA is ($4b vs $4.5b). So no longer the 43% premium I wrote about last month but still 12.5% to gain if you think the deal will go through (and want to own BofA stock at $42.60).

So BofA...what has Countrywide done in the last 6 weeks to increase their value by $400m? Certainly it wasn't the $422m loss last quarter or the $0.15 dividend on common stock and $1,812.50 dividend on preferred stock (not a mistype, it really is $1,812.50 a share). Come on BofA, what is it?

And you Countrywide/BofA fan boys: I expect you guys to be buying up CFC for that 12.5% premium.

-Jeff the Great

Jeff the Great Says "NO" to BofA/Countrywide!

I've been thinking a lot about the proposed $4.1B purchase of Countrywide Financial Corp by Bank of America Corp and came to a simple but important conclusion today: the market is against it.

Here is my analysis, for what it is worth.

First, lets look at the facts:

• BofA offered the equivalent of $4.1B to purchase Countrywide (all stock purchase)
• Countrywide's 1-18-08 closing market capitalization (stock price * number of shares) was $2.9b

Notice something there? BofA says that Countrywide is worth $4.1B but the stock market says it is worth $2.9B.

So why isn't the market valuing Countrywide at what BofA values them? If the sale goes through, owners of Countrywide stock stand to get the equivalent of $7.08 per share. However, the stock is trading at $4.96 per share. Anyone that thinks the BofA/Countrywide deal is a good one should run out and buy CFC shares! You'll make 43% on your investment!

But people aren't running out to buy the stock which contributes to the low price of $4.96 per share.

Now what does this tell us? Well, a few things:

1. Maybe investors don't think the sale will happen, and $2.9b is what they think Countrywide is worth on it's own (and that number declines everyday)

2. Investors probably think Bank of America over paid for Countrywide (the most obvious since current market cap is $1.2B less than the BofA offer)

3. Since the purchase will be made with BofA stock instead of cash, investors could be saying that BofA stock is trading higher than it is worth (overvalued)

4. And as part of #3 above, they could also be saying that Countrywide will make BofA less valuable after the acquisition

I am sure there is more, but I am no securities analyst. However I do know this: In theory the free market is the most efficient system for commerce. I also know that the stock market operates on free market principals. Therefore, it is safe to assume that stockholders are probably more accurate with their assessment of Countrywide (reflected in CFC stock price) than BofA.

So are you running out to buy CFC shares at a premium or are you sitting this one out? Food for thought....

-Jeff the Great