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Barclays Rallies on Deal Speculation

A Merrill Lynch analyst believes Bank of America is interested in acquiring the British bank

Barclays Rallies on Deal Speculation

A Merrill Lynch analyst believes Bank of America is interested in acquiring the British bank

Bank of America Corp. (BAC) wants to buy the British giant Barclays PLC (BCLYF), Merrill Lynch said in a research note Dec. 8. Barclays shares rose after the news, but not all market players jumped to the conclusion that the two financial services giants will ultimately hook up.

Charlotte, N.C.-based Bank of America, which is the second largest bank in the U.S., has indicated that it wants to expand its operations globally. Buying Barclays would give Bank of America a large international presence in fixed income oriented investment banking, a large U.K. retail and commercial bank, and the leading business in exchange traded funds and global indexed asset management, Merrill Lynch analyst Edward Najarian said in a research note. Meanwhile, the two firms could merge their U.K. credit card businesses.

Bank of America's "next big acquisition will likely be Barclay's PLC, and a deal could be announced near-term," Najarian said.

As one entity, Najarian thinks the two firms could save on things like overhead and staff expenses. He estimates that Bank of America could eventually increase its earnings from the acquisition, potentially by 2009, if it paid a 25% to 30% premium for Barclays. (Merrill Lynch, Pierce, Fenner & Smith Inc., which distributes Merrill Lynch research reports, has a significant financial interest in securities discussed in this report.)

Barclays shares rose 4.4% to $58.25 in early trading on the New York Stock Exchange. Najarian noted that the stock surged 3% on Dec. 7 as investors revisited the company's acquisition potential.

"Our biggest issue with Barclays as a target is that we believe management is extremely confident and is unlikely to recommend an offer that prospective buyers would be willing to make," said Keefe, Bruyette & Woods Ltd. analyst Mark Thomas in a research note. "There are further, major, regulatory constraints especially for U.S. buyers that would require material financial engineering to overcome."

Bank of America's stock fell 1.6% to $51.63 in early trading on the New York Stock Exchange Dec. 8.

Standard & Poor's Equity Research maintained its strong buy opinion on Bank of America shares. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) "We believe acquiring a global financial services firm like BCS fits well with BAC's strategy, and view BCS's current valuation as attractive for such a transaction," said analyst Frank Braden in a research note. "However, we would expect a hefty premium in any deal." Braden maintained estimates and did not change his 12-month target price of $63 per share.

Barclays didn't immediately respond to a request for comment. "We don't comment on market rumors or speculation," said Bank of America spokesman Scott Silvestri.