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BofA's Bet That Bigger Is Better

By Dean Foust For much of his two-and-a-half years at the helm of Bank of America, Kenneth Lewis went to pains to convince Wall Street that he wasn't like his merger-maniac predecessor, Hugh McColl Jr. While McColl seemingly never met a bank he didn't want to acquire -- much to the chagrin of investors -- Lewis all but swore off big bank mergers. Instead, he signaled that he would be content with niche deals -- say, for mutual funds that he could then cross-sell to his banking customers -- or short of that, simply focusing on making McColl's sprawling empire work better.

What a difference two years makes. On Oct. 27, Bank of America (BAC) said it had agreed to spend $47.8 billion to acquire Boston's FleetBoston Financial (FBF) -- a move that enables BofA to leapfrog past J.P. Morgan Chase (JPM) as the nation's second-largest bank. With FleetBoston, Charlotte (N.C.)-based BofA will now have a relationship with one out of every three U.S. households.

Lewis may have bided his time before he made a big merger move, but he'll likely still have a hard time selling this one to the Street. Investors were quick to register their disapproval of the deal, which gives FleetBoston stockholders a 40% premium. Although BofA's shares have risen 60%, including dividends, over Lewis' tenure, the stock sank nearly 10% shortly after the merger was announced, to around $74.

COSTLY CUSTOMERS. In a press conference, Lewis noted that he didn't think banks entering into deals "can do anything that anyone [on Wall Street] would like in the short [term]." Still, despite the hefty purchase price, Lewis insists that he expects FleetBoston to begin adding to earnings of the combined bank sometime in 2004 -- avoiding the heavy dilution to earnings that was often the case in McColl's costly mergers.

Ironically, the deal may not symbolize any reversal in strategic thinking by Lewis. It's probably more a change of attitude in the financial-services industry about the value of bank customers. As recent as the mid-1990s, many pundits looked disdainfully at retail banking -- which, given the expenses of maintaining costly branch networks and the requisite tasks of processing the billions of paper checks customers wrote, rendered many operations only marginally profitable.

Thanks to advances in technology, however, leading banks like Bank of America and Wachovia (WB) have managed to convince retail customers to pay bills electronically -- slashing the costs of maintaining their accounts. And with the sharp plunge in interest rates, banks are able to get away with paying less than 1% on checking accounts -- making depository accounts one of the cheapest, and most stable, sources of funds they have.

A NEW TACK? Against that backdrop, Lewis has helped Bank of America make more progress than other banks in cross-selling mutual funds, annuities, retirement services, and other financial products to its checking customers.

In the press conference, Lewis made no bones that he viewed the New England market where FleetBoston has its stronghold as "probably the wealthiest single market in the world." If he can continue his success at cross-selling a broad array of financial products to FleetBoston's wealthy customer base, this deal could have more hidden value than investors realize.

In the short term, Wall Street may have concerns that Lewis is suffering from the same merger myopia as his predecessor, but the FleetBoston deal may be different than those earlier acquisitions. Over the long haul, Lewis may be able to prove the value of using a regional retail banking concern to become bigger. Foust is BusinessWeek's Atlanta bureau chief

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