BofA Agrees to Buy Credit Card Giant MBNA

By Joseph Menn

July 1, 2005 12 AM PT

Times Staff Writer

Financial services giant Bank of America Corp. is poised to become the top player in the rapidly evolving U.S. credit card industry in the wake of its agreement Thursday to buy MBNA Corp. for $35 billion in stock and cash.

Already owner of the most retail bank branches in California and the country, Bank of America is buying MBNA at a time when credit card companies are struggling to cope with customers who jump from card to card in search of lower rates and take out cheap home equity loans to consolidate consumer debt.

If completed, the acquisition of MBNA -- the biggest independent credit card issuer -- would put Bank of America just ahead of JPMorgan Chase & Co. and Citigroup Inc. in the amount loaned out on credit cards, with more than $143 billion outstanding in 2004, according to research firm CreditSights. The bank would have 40 million active card accounts, behind Morgan and Citigroup.

MBNA and Bank of America customers shouldn’t notice much of a difference in their accounts, analysts said, but Bank of America hopes to use its broad physical presence to sell bank customers on highly profitable credit card deals.

“We can now deepen existing and future customer relationships,” said Bank of America Chief Executive Kenneth Lewis. “This merger also provides us with an attractive foothold in Canada, the United Kingdom, Spain and Ireland.”

Executives also plan to pitch the bank’s mortgage, auto-loan and other services to MBNA cardholders.

Bank of America -- formed in 1998 by the marriage of NationsBank Corp. of Charlotte, N.C., and San Francisco-based BankAmerica Corp. -- has been on a buying spree. Last year, the Charlotte-based company bought FleetBoston Financial Corp. for $48 billion.

Over a long history of acquisitions, Bank of America has moved from the South to the West and then back east, typically paying handsomely and then making the deals work financially in part by slashing jobs.

After the Fleet acquisition, “they fired so many people in Massachusetts that [U.S. Rep.] Barney Frank complained in Congress,” said Punk Ziegel & Co. analyst Richard Bove. The bank also cut thousands of jobs after a takeover in Florida.

The acquisition of Wilmington, Del.-based MBNA, which has 28,000 workers and is the largest employer in its home state, seems to fit that pattern. The $27.50 a share purchase price, all but $4.125 of it to be paid in Bank of America stock, is 31% above where the shares had been trading before they rose $5.09 to $26.16 on the news.

Bank of America, which traces its San Francisco roots to the 1904 founding of the Bank of Italy, said it would cut 6,000 jobs and take a $1.3-billion restructuring charge on the road to saving $850 million in annual expenses by 2007.

The bank said earnings per share would be $4.43 next year as a result of the acquisition, below previous estimates of $4.48 a share. Its shares dipped $1.30 to $45.61 on Thursday.

“The price is not cheap,” Prudential Securities analyst Mike Mayo wrote to clients, noting that the bank was increasing its dependence on a decelerating part of the financial world and yoking itself more to consumer sentiment.

As credit card revenue growth has slowed to 3% or less a year, MBNA has suffered even more than its peers. After it raised interest rates on its cards last year, customers defected, and the company issued a profit warning in April. Analysts predicted the 22-year-old firm would post its first annual drop in net income.

“It was time to hang up the cleats,” said CreditSights analyst David Hendler. “The credit card landscape had passed them by.”

Meanwhile, the credit card industry has been shrinking to a handful of major contenders. On June 6, Washington Mutual Inc. agreed to buy big card issuer Providian Financial Corp. for $6.5 billion. That furthered speculation that MBNA was on the block as well, even though it had begun cutting costs under shareholder pressure.

Credit card firms have been caught in a squeeze, said analyst Ed Groshans of research firm Fox-Pitt, Kelton.

During the recent boom in mortgage refinancings, two-thirds of borrowers have opted to take cash out -- with much of it being used to pay down credit card debt.

And with interest rates low, banks have a natural advantage. They can afford to offer a temporary zero-percent interest rate on credit cards because they earn money on the balance customers leave in their checking accounts.

“The credit card companies can’t compete,” Groshans said. “They’re running into the arms of the banks.” The next to go, analysts said, could be Capital One Financial Corp. of McLean, Va., or American Express Co. in New York.

MBNA holds some definite attractions for Bank of America. It has been very successful in managing its credit card accounts, with high average balances and one of the industry’s lowest write-off rates, at about 4.7%. Bank of America, meanwhile, has been weaker than average in this area, recently posting a write-off rate of 5.7%.

In addition, MBNA has been a pioneer in marketing profitable “affinity” cards. MBNA co-brands 5,000 lines of cards with partners including retailers, alumni associations and football teams. Pushing affinity programs “attracts the best customer you can possibly get,” said MBNA Chief Executive Bruce Hammonds, who will head Bank of America’s credit card operations.

On the downside, MBNA handles credit card business for other big banks, including Bank of America’s Charlotte rival, Wachovia Corp. Wachovia, reportedly an unsuccessful bidder for MBNA, and others may pull that business rather than share their profits with Bank of America.

With approvals from regulators and MBNA shareholders, the transaction -- which would be the second-largest corporate buyout in the U.S. this year -- is expected to close in the fourth quarter. The combined bank would have about 200,000 employees and $60 billion in revenue.

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Creating a credit card leader

Bank of America

- Headquarters: Charlotte, N.C.

- Formed: 1998, from merger of BankAmerica and NationsBank

- Chairman, CEO & President: Kenneth D. Lewis

- Branches: 5,889

- Assets: $1.2 trillion (on March 31)

- Active credit card accounts: 18.8 million

- Employees: 175,365

Biggest credit card companies

(Market share based on outstanding balances)