BANK OF AMERICA 1

COMPANY ANALYSIS

BANK OF AMERICA ANALYSIS

Contents
EXECUTIVE SUMMARY......................................................................2

INTRODUCTION....................................................................................3

HISTORICAL PERFORMANCE OF BANK OF AMERICA................3

CORPORATE GOVERNANCE AND THE CODE OF CONDUCT.....5

PERFORMANCE OF BANK IN TERMS OF CORPORATE
GOVERNANCE.......................................................................................7

SUSTAINABILITY AND ENTERPRISE PERFORMANCE................8

ACQUISITION OF BANK OF AMERICA.............................................9

APPENDIX.............................................................................................10
 BANK OF AMERICA 2
COMPANY ANALYSIS

EXECUTIVE SUMMARY
Calipers that is one of the customer services company, is looking to acquire the Bank of

America. Bank of America is the second largest bank in terms of the assets held by the bank.

Bank of America soon after its inception started to acquire many other companies. The bank was

expanding through this business. The bank’s financial analysis shows that the company has been

generating good profits for its owners. The bank was paying constant dividends to the equity

investors and this also increases the share price and hence the market capitalization of the

company. Now, Calipers is looking forward to acquire the Bank of America. To offer a price for

the bank, the free cash flow method has been used to calculate the firm value. Based on many

assumptions, the weighted average cost of capital for the bank has been calculated. Assumptions

regarding the terminal growth rate have also been made. In this way the firm value of $ 1595735

million has been calculated. This is the price at which Calipers should acquire this bank. Also the

corporate governance systems at the Bank of America are very strong. The company also has

strong policies related to the social and environmental factors. The corporate culture of the

company has been alive due to the activities of all the associates. The company pays a strong

attention towards the corporate social responsibility issues. The bank also places importance on

the part of its stakeholders. The bank works to align the interests of all the stakeholders with the

interests of the bank. Therefore, looking at such strong corporate governance practices Calipers

can also offer a premium over the value of the firm.

 BANK OF AMERICA 3
COMPANY ANALYSIS

INTRODUCTION
Calpers is looking forward to acquire Bank of America. Calpers is a company that

provides customer services such as providing health and pension benefits to 1.6 million retirees,

their families and employees. The company is providing those kinds of services through which it

can manage the financial securities of its associated people. The company has been managing the

largest public services fund till the 31stof March of 2013 in the United States.

On the other hand, the bank that is being acquired by Calpers is the Bank of America.

This bank has been operating successfully providing many services to the large corporations,

small businesses, individual consumers and large financial institutions. The company is

providing services related to asset management, banking and investing. Apart from that the bank

is also providing financial risk management products which are also known as the derivatives to

hedge the risks.

HISTORICAL PERFORMANCE OF BANK OF AMERICA

Bank of America is the second largest company in terms of the assets held by the

company in United States. Around 13% of deposits were held by this bank in the year 2009 in

United States. Bank of America is also one of the biggest banks of United States. The other three

banks are its main competitors in the banking industry and these are JP Morgan, Wells Fargo and

Citigroup.

Soon after the company was born, it started to make many acquisitions of companies. The

company first acquired the U.S Trust Corporation in 2007. This acquisition was a very strong

strategic move by the company to gain a competitive edge in the wealth-management business.

After this, the company had then announced the acquisition of Merrill Lynch and Co, Inc. This
 BANK OF AMERICA 4
COMPANY ANALYSIS

was in September 2008. The company had also received about $118 billion in guarantees and

also receive amount of $20 billion in government aid against the bad assets that the bank of

America had acquired.

The bank’s financial performance has been increasing over the period of time. If we

analyze its ratios from the annual report of 2013, the return on average assets has been increasing

over the period of five years from 2009. Apart from that, there is also growth in return on assets

ratio. The company is paying constant dividends of $ 0.04 per share to its equity holders. This

shows that the company is not changing its dividend policy and that it is paying stable dividends

which are ultimately increasing the share price of the company due to higher demand. Also the

net interest earned by the bank on earning assets has increased from 2012 to 2013 by 0.17%.

Bank of America has always placed emphasis on the values of the stakeholders. These

values of the company which have been developed over the period of time have been

transformed into a formal code of conduct. All the people working for this organization are

required to meet these code of conduct. Other stakeholders include the banks customers,

investors, clients, community organizations and regulators.The company engages these all

stakeholders in the activities of the company through shareholder meetings and also through

community rights, public policy, development and social environment areas. The company’s

historic performance shows immense growth and also great potential. Today in 2014 the

company has a market capitalization of $ 178.33 billion.

 BANK OF AMERICA 5
COMPANY ANALYSIS

CORPORATE GOVERNANCE AND THE CODE OF CONDUCT

The corporate governance system of Bank of America has been designed in a way to

provide fairness, transparency and accountability across all the business activities and operations

of the bank. The company’s directors to the employees are all committed to promote responsible

and ethical business. In 2014, a separate corporate social responsibility committee was formed.

This committee managed all the concerns related to corporate social responsibility issues. As

soon as this committee finds any issues related to the corporate governance system of the bank,

the committee reports it to the CEO of the bank and also provides recommendations for

overcoming those issues.

This team is being managed by the Consumer Policy Executive and Global CSR. These

both are responsible to ensure that the bank is achieving the CSR strategy and also engaging its

stakeholders in these issues. The company has always done the business through the right way to

provide value to the shareholders, customers and the clients. The management structure of the

organization ensures that the bank is complying with the regulations and with all the laws. The

company has also set up clear lines of accountability, fairness and decision making.

The company also has a unique corporate culture. It is the responsibility of each director

and the associates to sustain the company’s corporate culture. The company had transformed its

values which it had developed over the period of time into specific code of conducts. These

codes of conduct should be promoted aggressively to all the associates. The company had always

emphasized on openness and had promoted the culture of openness so that all the employees of

the organization carry out healthy discussions and also bring serious issues in light of the senior

managers if they feel anything is going wrong. The company is focused on creating value for its
 BANK OF AMERICA 6
COMPANY ANALYSIS

shareholders and providing exceptional services to all its customers and clients. The company

wants to build an environment of trust among its management and all of its stakeholders.

When the bank decided about the composition of the entire board, the company assesses

a number of factors of all the individuals. Such factors included the ability or the capability of

the employees to analyze the environment and also estimate how the social and potential

environment would be affected and how much capacity the members of the bank have to guide

and implement the strategy of the company.

The senior executives of the company possess different set of skills and expertise to

provide the bank with the road map through which it could achieve its all targets. These directors

have unique attributed and they help the company by providing them diverse experience and also

different perspectives to think from. The company therefore, assesses the directorship candidates

on the basis of diversity. These directors are appointed by the voting of shareholders and Bank of

America has currently 13 independent directors out of the total 15. Apart from this all, the

corporate governance system of the company had also emphasized on risk frameworks. The

company needs controls in place to manage the risk faced by the company. This risk framework

is designed by the Board of Directors and the management together.

PERFORMANCE OF BANK IN TERMS OF CORPORATE GOVERNANCE

The corporate governance system designed by the management of the company is

performing very well. The company had transformed its set of values into specific codes of

conduct. The employees of Bank of America all share the same set of values. The focus on four
 BANK OF AMERICA 7
COMPANY ANALYSIS

important things that is to act responsibly, delivering together, realizing the power of the people

and trusting them.

The Bank of America had worked with civil servants, officials and the agencies of the

government to build a system of finance that is based on strong grounds and that this system is

globally spread. The company had also taken steps to place controls so that fraudulent and

money laundering activities should be prevented. Also the current credit rating of the company

regarding its senior debts shows that the company has good credit ratings which reflect that the

bank is not much aggressive in raising long term debt and that the company has always

maintained high credit ratings. The directors of the bank have always had good dialogue with the

credit rating agencies.

Regarding the performance effectiveness of the company’s corporate governance system,

the company has made contingency plans to meet the performance standards still in difficult

scenarios. These include the notification procedures and also the communication procedures that

should be adopted at the time of stress. Apart from that the managers of the company and the

board of directors approve the risk management framework to analyze the risk being faced by the

bank. These all corporate governance policies show that the governance system at Bank of

America is transparent, open and strong.

SUSTAINABILITY AND ENTERPRISE PERFORMANCE

The Board of directors are constantly scanning the external environment surrounding the

Bank of America. They are always seeking for opportunities and are also making themselves

aware about the threats surrounding them. The company considers all the environmental and
 BANK OF AMERICA 8
COMPANY ANALYSIS

social factors. These responsibilities are then fulfilled by the audit committees and the enterprise

risk committees. If the shareholders of the company have any issues regarding the social or

environmental risk factors than they can easily voice their issues at the annual general meeting

through voting rights.

When the management of the company decides to make certain decisions, they also

consider all the environmental risk factors and social issues before reaching on to any decision.

They get help to make these decisions perfect through energy policy, credit policy, climate

change policy and the equator principles. In 2014, green bond principles were formed by the

bank. This was a consortium of environmental groups and financial institutions. These

institutions help people by giving them advice related to the impact of green bond investments

due to environmental risk factors.

The bank’s greater concern for the surrounding environment and the sustainability

increases the reputation of the bank and it shows that the bank’s management is much concerned

about the surrounding environment. This in turn increases the confidence of the investors to

invest in the bank.

ACQUISITION OF BANK OF AMERICA

The firm value of the Bank of America has been calculated on the basis of free cash

flows of the 7 year period from Dec 07 to Dec13. The free cash flows were adjusted for all non-

cash charges and the capital expenditure was also deducted to calculate the net free cash flow of

the firm. To calculate the cost of capital, the cost of debt and the cost of equity have been

calculated. The cost of debt is the after tax of the average interest rates of the bank of America.
 BANK OF AMERICA 9
COMPANY ANALYSIS

The cost of equity has been calculated through the capital asset pricing model formula. Apart

from that the terminal value growth rate has also been calculated. The WACC has been

calculated based on the 2013 annual report values. This gives us a reasonable cost of capital of

7%, the present value for each year and the terminal value of the last year has been calculated to

find the value of the firm which is $ 1595735 million. This is the most reasonable estimate of the

value of the Bank of America. Calipers should bid for this amount to acquire the Bank of

America.

Looking at the corporate governance practices at the Bank of America, it seems that

Calipers can also offer a higher price equal to the premium to acquire the Bank of America. The

financial analysis of the bank shows that the bank is performing well in its industry. The terminal

growth rate is also based on certain assumptions. If it holds true, than the bank is a good

acquisition for Calipers.

DUE DILIGENCE PLAN

The most important steps with regard to a due diligence plan are preparation, execution

and closure. The management of Calipers should gain a good understanding about the working

environment, products, sales and profitability about the target bank which it is to acquire. The

company also needs to calculate the value of the potential synergies that would be created by the

potential acquisition. The company will also have to allocate resources to its due diligence team,

which would comprise about the most expert legal, business and financial representatives. If the

company lacks the resources and the expertise, it might seek the help of an accountancy firm or a
 BANK OF AMERICA 10
COMPANY ANALYSIS

law firm to carry out the due diligence procedure. A checklist should also be created of all the

potential risks associated with the target acquisition.

After that the execution step comes in. As the due diligence process is a fact finding

mission and a broad risk assessment tool, it should be planned in the form of a framework so that

all the risks are identified, synergies calculated and the right price is determined. Therefore, the

due diligence teams needs to analyze the Bank of America’s valuation, legal and regulatory

compliance, integration plans and the expected synergies. Apart from that, the corporate culture

of the target should also be analyzed to highlight issues related to the workforce diversity and

organizational culture.

Finally, the last step of closure comes in where the due diligence team submits the report

to the management. In this report all the misrepresentations, expected synergies, potential risks

and all the irregularities are identified. These all factors will identify what can go wrong in the

target company, how the price needs to be negotiated. Since, the Bank of America is complying

with all the regulations and the principles of corporate governance, therefore it is likely that the

risks in the bank are low and the valuation of the company is fair.

ACTIVIST INVESTING

Activist investing has both advantages and disadvantages for the investor and the

company itself. An active investor is one who buys a large amount of shares of a company. This

is mainly done when the person or the firm is dissatisfied with the management. One of the

example of activist investor is Carl Icahn. At times this is a very positive move for the company.

Such individuals buy large stocks of the company’s shares and then they pressurize the company
 BANK OF AMERICA 11
COMPANY ANALYSIS

to improve the share price of the company. Therefore, this impacts positively on the performance

of the company. The activist investors in the cases USG, Home Depot and GE were present to improve

the situation of their company and improve their share price.

The government at times also acts as an activist investor, at times when the economy of the

country is performing poorly. Also it is evident from the history, that the organizations where activists

are present perform very well in the long run, create value for their shareholders and the business

prospers. If we talk about Warren Buffet, he can also be considered as a successful activist. However,

this has disadvantages too, if the shareholders consider the company as their potential acquisition

target, but the advantages outweigh the disadvantages.

 BANK OF AMERICA 12
COMPANY ANALYSIS

APPENDIX
Bank of America Corporation Annual Data (A)
7- 8- 10- 11- 12- 13-
9-Dec
Dec Dec Dec Dec Dec Dec
-
Cash Flow from Operations 11,03 4,03 129,7 82,54 64,44 92,81
16,05
(ADJUSTED) 6 4 31 1 8 7
6
-
less: investment in CAPEX -911 -243 0 0 0 -521
2,143
-
3,12 129,4 82,54 64,44 92,29
NET FREE CASH FLOW 8,893 16,05
3 88 1 8 6
6

COST OF DEBT (B)

INTEREST BALANCE SHEET INTEREST
 
EXPENSE AMOUNTS RATES
DEPOSITS 1396 1119271 0%
SHORT TERM
2923 45999
BORROWINGS 6%
LONG TERM DEBT 6798 249674 3%
AVERAGE COST OF
   
DEBT 3%
AFTER TAX Kd     2%
 BANK OF AMERICA 13
COMPANY ANALYSIS

WACC (2013) (C) 2013 DATA

BETA 1.42 Earning per share 0.94
RF 3.12% Dividend per share 0.04
RM 10% Outstanding shares 10,731,165
10087295.
COST OF EQUITY 13% Earnings 1
TAX RATE 35% Dividends paid 429246.6
TERMINAL GROWTH RATE 3% Payout Ratio 4%
EQUITY 233947 Plowback Ratio 96%
Return on
DEBT 263416 investment 0.53%
E/E+D 47%    
D/E+D 53% Growth Rate by other method is
RETAINED EARNINGS 9658049 1%
1008729
TOTAL EARNINGS 5
RETURN ON EQUITY 3%
WACC 7%

FIRM VALUE (D)

YEARS 7-Dec 8-Dec 9-Dec 10-Dec 11-Dec 12-Dec 13-Dec
FREE CASH FLOW 8,893 3,123 129,488 82,541 64,448 -16,056 92,296
DF (7%) 0.93354 0.8715 0.81358 0.75951 0.70904 0.66192 0.61793
PV 8301.99 2721.7 105349 62691 45696.1 -10628 2235865
TERMINAL VALUE             1381603
FIRM VALUE             1595735
 BANK OF AMERICA 14
COMPANY ANALYSIS

CITATIONS

http://shareholderactivismcenter.blogspot.com/

http://qz.com/62431/the-10-activist-investors-you-should-know/

http://www.cnbc.com/id/47017943