Executive Summary
Bank of America (BoA) decision to acquire Merrill Lynch seemed to be a good deal, considering that Merrill Lynch was one of the leading investment banks in the US and operating in other countries worldwide. As the CEO of BoA said that the merger would be of great significance as it would transform BoA to one of the leading investment banks as well as offering BoA an opportunity to provide to their clients a wide range of financial services as opposed to small-scale services it provided before the acquisition plan. However, the merging did not appear like a good deal for the management after realizing Merrill’s financial distress, because it would mean dragging BoA toward the financial struggles of Merrill Lynch since BoA would assume all the loses of Merrill if it acquires it (Story & Creswell, 2009).
Upon realizing the Merrill Lynch worst financial position after Merrill’s result of fourth-quarter which was estimated to be $12 loss, BoA CEO opted to call off the acquisition, but this did not succeed because of the risk it would invoke to the entire financial system of the US and to the BoA itself. Thus, the merger had to go through to save US treasury as well as BoA, but this decision would face the manager of BoA with problems. These problems include financial loss which will be absorbed from Merrill’s poor performance, and this will impact shareholders and employees, and poor management due to the expansion of the BoA’s operations and cultural conflict between workers of BoA and Merrill Lynch. This paper focus to suggest the possible solution which may be considered for implementation by BoA’s management. The recommended action plan includes seeking a bailout from a federal government to cater for losses and strategic staffing to solve poor management and cultural conflicts.
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Statement of the Problem
The decision to acquire Merrill Lynch would lead to two significant problems facing the manager; the problem of operating into financial losses and poor management issues. Financial loss is a short-term problem which leads to short-term impacts such as conflict of interest between the shareholders and the bank and the employees as well. The operating will come from the weak financial position of the acquired company, because taking the company meant assuming all its operations including the financial distress it was going through, and therefore diluting the earnings of the BoA.
Secondly, poor management comes as result of the expansion of the BoA’s operations through acquisition, which leads to ineffective management. Additionally, inefficient management may come from the cultural diversity of employees from both companies which may result in conflicts regarding payment as well as the norms and cultures concerning their operations. This problem may be realized in the long term. Therefore, the manager will be faced with a difficult task to make decisions to find a way of saving the company from operating losses and how to apply his management skills to run the big business formed through acquisition efficiently.
Causes of the Problem
The problem of operating losses may also be contributed to the fact that, expanding a company comes with additional expenses such as labor and assets as well, among others. BoA can run losses from the acquisition because it will not be able to compensate for the additional expenses. Therefore, BoA will have to exhaust its retained earnings, an action that will drain the existing profits it used to make. Besides, struggling to raise capital to cover Merrill’s losses after acquisition may render it bankrupt in the long run.
Similarly, poor management may be linked to the theory of complexity of universal banks, which entails additional problems relating to capital allocation, management of risk and conflict of interests. Hence, acquisition of Merrill will make BoA a universal bank and will be likely to face the problem of complexity.
Decision criteria and Alternative Solutions
Seeking for federal government bail will be a cheaper and a convenient means to source for finances for BoA than acquiring loans from private organizations or other banks. Also, the required huge amount of money which could be obtained easily through government loans (Goldman, Luhby & Wong, 2009). Alternatively, strategic staffing which involves defining the number of employees needed, the resources required for their operations, projecting factors such labor turnover and implementing staffing actions by effectively engaging the employees (Bachet, 2012). This suggested solution will be accepted by the management as it takes a short time to implement depending on how effective the management work to achieve it.
Even though borrowing from government may be a cheap and convenient way to raise money to absorb the purchase of Merrill, it may, however, add additional cost in the form of the interest it will accrue for its repayment. Similarly, strategic staffing implementation may not be achieved so easily because it is not just about the defining the steps, but what counts is how the steps are developed and implemented (Bachet, 2012).
Recommended Solution, Implementation, and Justification
The recommended action plan of seeking the loan from the federal government should be an action that must be addressed jointly by the management and the stakeholders. The contingency plan to back it up is to invest in other profitable projects that will assist to raise earnings to pay back the loan. On the other hand, strategic staffing should be addressed by the management after the acquisition. The contingency plan to back it up is to lay down appraisal principles of promoting employees based on their performance, an action that will enhance employees’ morale, increase their productivity and enhance their cooperation as well.
References
Bachet, T. (2012). Developing Staffing Strategies That Work: Implementing Pragmatic, Nontraditional Approaches. The Walker Group.
Goldman, D., Luhby, T., & Wong, G. (2009). BofA: $20B bailout, huge Merrill loss. CNNMoney.com, New York.
Story, L., & Creswell, J. (2009). For Bank of America and Merrill, Love Was Blind. The New York Times. Retrieved from http://www.nytimes.com/2009/02/08/business/08split.html
