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


Anonymous said...

Great points. I had not followed the price spread since the announcement. But, you likely hit on several reasons for the spread. The deal may not happen. Or, it may not happen at the price now stated. Or, finally, the value may end up being less by virtue of a decline in the BofA stock price.

Jmartens said...

This should be interesting...we all knew BofA was reporting earnings on Tues Jan 22nd but I also learned that we have Countrywide on Jan 29th. Both are Q4's....

Anonymous said...

FYI - No less than the Wall Street Journal listed this as a deal that may not happen in the end.

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