Why buy Countrywide?
Posted
Jan 11 2008, 04:58 PM
by
Matt Koppenheffer
The best person to ask would be Ken Lewis, CEO of Bank of America, since B of A went ahead and announced an agreement to buy Countrywide for roughly $4 billion, or $7 per share.
Ken is a bit busy, though so I'll go ahead and tackle it. Here are three scenarios from most to least optimistic:
- Countrywide's stock has been beaten down so far that Bank of America could no longer resist buying a valuable asset at a price well under its true value. Plus, B of A sees the opportunity to build its mortgage lending arm and lower borrowing costs for Countrywide.
- Having already sunk $2 billion into Countrywide, B of A decided that it'd rather take matters into its own hands than continue to watch the value of its investment sink.
- And finally (tip of the hat to Herb Greenberg on this one), Countrywide was really on the edge of bankruptcy and the Federal Reserve got into the mix by pushing for the deal and offering government backing for any losses from Countrywide.
My best bet falls somewhere between two and three. In the longer term, Countrywide's mortgage platform may turn out to be a great asset for B of A, but I just don't believe that it provided the push to get a deal like this done right now.
In the end, this hardly seems like a good outcome for Countrywide investors -- which include Legg Mason's legendary fund manger Bill Miller -- since they've seen shares fall about 85% since the beginning of 2007 and this essentially locks in that loss. Of course, for those that believe number three above, $7 per share sure beats the heck out of zero.
As always, I turned to The Motley Fool's CAPS service to gauge the reaction of some of the investors there. Though there were some sprinkles of optimism, most of the reactions skewed negative:
- Dwot (on Bank of America): "Good move, buy out a company that will impair the balance sheet..."
- DemonDoug (on Bank of America): "The deal that Bank of America is making for Countrywide is the absolute worst deal for Bank of America, although I believe that they are likely getting some favors in terms of the Federal Reserve and some likely tax breaks and/or government contracts. However, even with favors and favorable governmental policies towards your company, you need to execute your business plan. In this case? Bank of America's business plan is going to execute them."
- Alin0Steglinski (on Countrywide): "[The] long term picture looks good... rough time in industry at this time... although at no time will the world 'stop' needing mortgage lenders. Countrywide will be there when the economy fixes up a bit."
Have some reactions of your own on the deal? Head over to CAPS and let 80,000 other investors know how you feel.
(Full disclosure: I own shares of Bank of America, but do not have a financial position in any of the other companies mentioned.)
