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Merrill deal may pay off for Bank of America

Bank of America's (BofA) quest to buy Merrill Lynch should pay off for BofA and its investors if it is right about the credit crisis nearing a bottom, Barron's said in a report.

The combined company should be able to generate 6% to 9% annual revenue growth and 10% growth in earnings per share on “the other side” of the financial crisis, Barron's quoted Bank of America Chief Executive Ken Lewis as saying.

Lewis struck the $50 billion in stock deal with Merrill, believing that the United States is in a shallow recession and that the credit crisis is approaching a bottom, Barron's said. The report quoted Lewis as saying a true bottom will not emerge until the US housing market begins to stabilize, which he expects in the first half of 2009.

If Lewis' assumptions about loan performance and the economy are right, the deal should add to Bank of America's earnings by 2010, the Barron's report said.

In the event Merrill's loans are priced to market and the market accurately reflects future losses, it will not cause losses for Bank of America but if they are not priced low enough, the latter may have to increase write-offs, hurting earnings and shrinking its assets, the report said.

But the US Treasury's move to establish a rescue plan that would buy troubled assets from financial institutions could help stabilize debt prices and may be positive, the Barron's report noted.

If the deal is approved by both firms' shareholders, the combined entity will have leadership positions in commercial, consumer and investment banking and retail brokerage, according to the Barron's report. (Reuters)