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Acquisition of Merril Lynch by Bank of America - Essay Example

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This essay analyzes the biases in decision-making by a corporation’s senior executives in the light of Bank of America’s acquisition of Merrill Lynch in 2009.The self-serve bias, one of the strongest biases faced in organizational decision-making…
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Acquisition of Merril Lynch by Bank of America
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Download file to see previous pages The self-serve bias, one of the strongest biases faced in organizational decision-making, is a tendency to favor oneself. Generally people taking decisions with this kind of bias, credit themselves for success of their decisions while blaming others for their wrong decisions (Tosi, Mero & Rizzo, 2000, p.79). The aim of this essay to analyze if the decision taken by Bank of America’s executives was a result of self-serving bias. Background of the Problem Bank of America acquired the almost collapsed Merrill Lynch in January 2009 with the approval of shareholders of both the companies. The deal was worth $50 billion. The acquisition made the bank world’s largest financial service provider. However, the earnings released in the same month revealed losses of $21.5 billion in the fourth quarter of Merrill Lynch. The executives of BOA in the announcement before the voting by shareholders provided an unjustified and randomly projected losses rather than the actual analysis of Merrill Lynch. This called for two times infusion of money by the government. However, the executives of BOA in November testified in a Congressional Hearing that they relied on faulty data in order to gain shareholder vote on the acquisition. The forecasts of losses were faulty and some of the losses from collateralized debt obligations for the month of November and December, and various other illiquid assets were omitted. This omission of losses from the financial model used by Merrill Lynch, led to around $9 billion losses where the actual pre-tax losses should have been $18 billion (Cohan, 2009). The carelessness and absence of due diligence on part of BOA executives has had cost its shareholders and resignation of the chairman of BOA Kenneth D. Lewis who also happened to be the chief executive of the bank. However, there is another aspect of the situation faced by BOA i.e. the executives in their testimony also provided the reason for ignoring the significant losses to be pressure from the government to acquire Merrill Lynch before it declares bankruptcy. Analysis of Executives’ Behavior The BOA executives’ testimony in case of Merrill Lynch’s acquisition shows that they deliberately ignored to make a careful analysis of the accounting books of Merrill Lynch. The possible reason for this could be that they had already made up their minds about the acquisition and so ignored the basic principle of investment decision-making i.e. due diligence (Stowell, 2010, p.71). The motivation could be from the fact that the acquisition made BOA world’s largest financial services company and this could have been linked with the compensation and bonuses of the executives. BOA was also interested in buying the bankrupt Lehman Brothers, which was eventually taken over by Barclays. Moreover, BOA executives’ over confidence stems from another recent successful acquisition of Countrywide Financial Corporation that made BOA America’s biggest home lender (Mildenberg & Keoun, 2008). At the time of acquisition announcement it was believed by many analysts that if BOA was able to restrict the bad assets, then Merrill Lynch’s retail distribution with sales force of 16,690 brokers managing $1.6 trillion of assets, could be the most profitable deal the bank had got during the financial crisis (Mildenberg & Keoun, 2008). Unlike Barclays’ acquisition of Lehman without its bad assets for a much smaller amount, the Merrill Lynch deal was a hasty decision by BOA’s chief executive Kenneth D. Lewis. Lewis had been the driving force of BOA’s success around the nation (The New York Times, 2009). In a study of self-serving bias in managerial decision-making, it ...Download file to see next pagesRead More
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