Bank of America Tries the Value Game with Countrywide Investment

In recent years Bank of America (BAC) CEO Ken Lewis has taken a decent amount of heat from shareholders who have seen his acquisition spending spree as a bit reckless, at least in terms of the prices he has been willing to pay. Deals for the likes of FleetBoston and MBNA have made sense strategically, but the huge premiums offered did little to convince BAC investors that they were getting a good deal. That, in part, has contributed to the fact that BAC has been afforded a low multiple in the marketplace, relative to other large banking institutions, in recent years.

I found it interesting, given the deals that Bank of America has done already this decade, when news crossed the wires that BAC was investing $2 billion in Countrywide Financial (CFC) in the form of convertible preferred stock. The terms of the special stock issuance (a 7.25% annual coupon, convertible into almost 20% of the company’s common shares) were attractive, but that would be expected given the turbulence in the mortgage market right now. Countrywide is the largest independent mortgage lender in the nation, but still is facing short term funding concerns as the commercial paper market, a key tool for the company, has been drying up quickly in recent weeks.

With this deal, Lewis seems to be taking a contrarian approach. Obviously, I will not fault him for that given my investment strategy preference, but I just found it interesting that he had the patience to not bid for CFC when mortgage times were good (evidently the two firms have been talking about possible partnerships for years) and was able to pull the trigger when most others would be too afraid to do so.

Only time will tell if the Countrywide investment was a good one, but I like what Lewis did here. He gets CFC shares at $18 each if the company comes out of this mess a strong survivor, gets paid 7.25% per year while he waits for things to play out, and slides ahead in line of common stockholders to claim any assets should the worst case scenario unfold for the country’s leading mortgage player. Evidently he thinks the possible bankruptcy rumors are unfounded, and if he’s right, shareholders will have a tough time arguing with this latest deal.

Full Disclosure: Long shares of Bank of America at the time of writing