What have you always wondered about the economy? Tell us

Acquired banks are allowed bad reports

Rachel Dornhelm Oct 17, 2008
HTML EMBED:
COPY

Acquired banks are allowed bad reports

Rachel Dornhelm Oct 17, 2008
HTML EMBED:
COPY

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.

As a nonprofit news organization, our future depends on listeners like you who believe in the power of public service journalism.

Your investment in Marketplace helps us remain paywall-free and ensures everyone has access to trustworthy, unbiased news and information, regardless of their ability to pay.

Donate today — in any amount — to become a Marketplace Investor. Now more than ever, your commitment makes a difference.