2017 MBA@UNC Global Immersion: New York City Day Two

MBA@UNC Global Immersions are offered four times a year as unique opportunities for students to travel to major domestic and international business destinations with their fellow classmates, participate in engaging discussions with their professors and elite industry leaders, as well as apply what they have learned to real-life problems.

NEW YORK—Amazon’s purchase of Whole Foods Friday for $14 billion makes it the company’s largest acquisition to date.

Speculation about the implications of the acquisition is widespread, including how Amazon will use its new 440 Whole Foods stores and 11 distribution centers and how this purchase will impact the shifting brick-and-mortar grocery market. Yet in the business world, the strategy leading up to the transaction is just as key.

At the second day of MBA@UNC’s New York City Immersion, students in the financial track attended Professor Anil Shivdasani’s session, “The U.S. Financial Crisis and the Art of the Deal.” Having previously worked as the managing director in the investment banking division of Citigroup Global Markets Inc., Shivdasani focused the session on “one of the most defining financial takeovers in recent history,” the Bank of America acquisition of Merrill Lynch in 2008.

“Part of the goal is being here in New York City, the financial capital of the world, talking about financial markets and how financial institutions operate,” Shivdasani said in an interview. “But it’s also to take a step back in time. For those who didn’t follow financial markets as closely during the financial crisis, it’s often not appreciated how controversial and transformative this acquisition was.”

As rival investment bank Lehman Brothers Holdings Inc. struggled to remain solvent in the credit crisis, Merrill Lynch’s value dropped precariously as well. Merrill Lynch CEO John Thain approached Bank of America CEO Ken Lewis to propose purchasing a minority interest, and negotiations progressed to Bank of America’s full acquisition of Merrill Lynch.

At the time, acquiring Merrill Lynch was supposed to fill “every single hole that Bank of America had,” according to Shivdasani.

The seemingly perfect acquisition, however, quickly became known as the “Deal From Hell.” The day after Bank of America announced its purchase of Merrill Lynch for $50 billion, Lehman Brothers Holdings Inc. declared the largest bankruptcy in history, a key turning point in the financial crisis as stocks continued to drop and the market became increasingly fearful.

Shivdasani painted a picture for students of how tense this time was, describing that during his tenure at Citigroup, “every day the headline was one of my clients,” and “for a year and a half, it looked like a funeral every day.”  

The case, Shivdasani said, is one he is peripherally connected to, as Bank of America hired him for independent analysis of the transaction after the fact. As a result, he told students, “What we’ll talk about includes some personal analysis of what I saw in this transaction.”

For some students, like Mahi Amjad, who works in finance for an education technology company in Washington, D.C., this context was key to today’s session. She was in high school during the financial crisis.

“It’s been really interesting to get perspectives of people who lived through it,” Amjad said in an interview. “From our discussions of how Bank of America handled the deal, we talked about what should have been disclosed ethically. But by making the choice they made, they effectively saved the world with the Merrill Lynch acquisition.”  

For other students, like Brian Jackson, who is a quality director at Colt Firearms in Connecticut, the financial crisis was personal. His ex-wife worked for Bank of America during the acquisition.

Merrill Lynch was at risk of going under next, and “the human capital piece was at play,” Jackson said. “You didn’t want to lose the high-performing individuals at the company who would go to other companies.”

With clear justification for the transaction, Shivdasani prompted students to answer the even tougher questions: Did Bank of America do it at the right time? And did they do it for the right price?

In the wake of the Lehman bankruptcy, if Bank of America held off on making the acquisition, Merrill Lynch in all likelihood would have fallen immediately after, students discussed. Merrill Lynch stock prices continued to fall approaching the final shareholder vote for the acquisition in December 2008, and executives chose to withhold internal projections that Merrill Lynch would total $16 billion of fourth-quarter losses. If Bank of America had disclosed the projected losses to shareholders before the vote, they might have voted against the acquisition.

Because of Bank of America’s decision to not disclose the projections, they paid a $2.43 billion settlement for the class-action lawsuit by shareholders and implicated the American taxpayer with the government’s $45 billion bailout, repaid in full in December of 2009.

Discussing this context of the financial crisis and transaction “holistically” was key to truly understanding the complexity of the acquisition, said Jeffrey Preston, a student from the New York area who works in analytics and data.

“I’m on the other side of the firewall at Morgan Stanley. I work on the wealth management side, public information, so I wanted to get deeper insights on the [mergers and acquisitions] and investment banking side.”

On day two of the finance track, students also attended sessions about investing in emerging markets with Raj Gupta, CEO of SeaCrest Investment Management, LLC, and about rational and behavioral insights related to trends in the capital markets with Professor Bill Weld.

Importantly, digital disruption in the business world today means that “a lot of the uncertainty and risks we saw in this transaction is something we’re seeing today too,” Shivdasani said.

“It’s times of distress that offer the best opportunity but also the highest risks, and how you manage that tradeoff is absolutely critical.”