As we predicted last night, shares of Bank of America are falling today after it announced that it was acquiring Merrill Lynch. The stock is off around 15 percent this morning. Because the acquisition of Merrill is an all stock transaction, with Merrill shareholders receiving 0.8595 shares of Bank of America for each share of Merrill, the stock movements mean that the market is now pricing the shares of Merrill significantly below the $29 per share first announced. Bank of America is now paying $24.63 for a share of Merrill.
Merrill shares continue to trade at a discount from Bank of America's, although you have to be cautious about reading too much into merger spreads in all stock deals. This could be a bet on further declines of bank of America stock, or a pricing of risk that the deal will not actually close. Alternatively, it could simply reflect the presence of speculative arbitrage in the market.
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