I'm not surprised that Mother Merrill was forced into a shotgun marriage with Bank of America, although I am surprised at the speed with which the marriage was consummated. Credit this to the conviviality of CEO John Thain with Treasury Secretary Hank Paulson, based on their history together at Goldman Sachs. When the history of the Sovereignty Crunch is written, the sub-rosa role played by Goldman's alumni network will be writ large. Given the strength of this network, it may be fair to say that Wachovia will be the next candidate for salvation via merger - because its CEO Robert Steel is another Goldman alum!
I'm further surprised that BofA ended up as Merrill's purchaser, given Merrill's previous joint ventures with HSBC. I guess HSBC found Merrill's culture not to their liking. Perhaps HSBC is keeping its powder dry for a future acquisition . . . UBS? The HSBC Hexagon can probably digest the UBS Three Keys without much outside help, unless the venerable folks from Hong Kong and Shanghai have some ungodly counterparty exposure to trades with Lehman.
Back to the main story. I wouldn't be posting this if I didn't think I could make some money from what's happening. This buyout perfectly fits my special situations strategy, so today I placed market orders to sell call options on MER (Jan 09 @ 31) and BAC (Oct 08 @ 35). The $31 option for Merrill is slightly above the estimated per-share value of Merrill ($29-30) that Bank of America has offered, and the $35 option for BAC is slightly above BAC's closing price prior to the buyout announcement. I may roll the BAC call next month, and the MER call will most likely expire worthless next January.
"Be fearful when others are greedy and greedy when others are fearful." Thank you, Warren Buffett. I owe it all to you.
Nota Bene: Anthony J. Alfidi holds short calls on BAC and MER. He has no positions in WB, HBC, UBS, or GS at the time this commentary was published.
