Acquired banks are allowed bad reports

A man passes by a Wachovia Bank branch October 2, 2008 in Washington, DC.

TEXT OF STORY

Renita Jablonski: Merrill Lynch, on the other hand, reported below expectations. In the next two weeks, Wachovia and Washington Mutual report results.
All of these banks have been acquired in the last month, so here's a question: If they're turning in terrible earnings, could those deals fall apart? Rachel Dornhelm reports.


Rachel Dornhelm: You'd think if something you've agreed to buy drops in value, it would make you reconsider the purchase. Or at least renegotiate.

Jim Wilcox is a professor at UC Berkeley's Haas School of Business. He says an acquiring bank, like Bank of America, might not see a large write-down at its troubled partner as an entirely bad thing.

Jim Wilcox: By the time the combination actually takes place, the balance sheet of the acquired company, in this case Merrill Lynch, would look relatively healthier than it would have if they hadn't done this house cleaning.

There's another reason these bank sales are still seen as relatively solid. James Barth at the Milken Institute says the Treasury Department's move to inject capital into banks will help those that are buying distressed institutions.

James Barth: That puts them in a better position to do acquisitions and offsets some of the negative earnings reports.

Barth says before banks commit to a purchase they've done due diligence. It's unlikely one bad earnings report will change their mind.

I'm Rachel Dornhelm for Marketplace.

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