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Bank of America: MBNA buy could trigger further US consolidation

4th July 2005

Bank of America has agreed to acquire MBNA for $35 billion.

Bank of America has announced a $35 billion agreement to acquire MBNA. This deal could see Bank of America oust JPMorgan Chase from the US credit card top-spot, and has led to speculation that Capital One, Discover and American Express could become takeover targets for US banks.

If the deal is accepted by shareholders and regulators, Bank of America [BAC] will pay a combination of cash and shares equal to $27.50 a share for MBNA [KRB]. The acquisition will provide Bank of America with a strong platform for growth, through allying its deposit-generating ability and existing card operation with the additional lending capabilities of MBNA. Indeed, BOA chairman and CEO Kenneth Lewis described MBNA as a "selling machine".

The acquisition is one of the largest in banking history and its completion will see Bank of America become the largest credit card issuer in the US by balances outstanding, pushing JPMorgan Chase [JPM] and Citigroup [C] into second and third place, respectively. The move will not only give Bank of America more than 20 million new customer accounts, but also affinity relationships with more than 5,000 partner organizations and financial institutions.

In the immediate aftermath of this deal, speculation has begun to mount that both Capital One and Discover will become targets for other, larger, issuers. Capital One is viewed as a particularly likely to be subject to a bid in the near future as a result of pressure on the monoline business model.

Speculation over the possible spin-off of Morgan Stanley-owned Discover will also raise the interest of many in the market. However, with Morgan Stanley's new chairman and chief executive John Mack only recently installed, it is unlikely that this would happen in the immediate future.

Despite being a top-five US card issuer, American Express is highly unlikely to become a takeover target. As it operates as both an issuer and a card scheme, Amex would not be an easy business to integrate with any existing setup and, as such, is expected to remain independent. Even without Amex's involvement, however, big changes could be in store for the US credit card industry if the Bank of America-MBNA deal sparks off a trend in acquisitions.

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