Charlotte, N.C.-based Bank of America has the most deposits of any U.S. bank, while Merrill Lynch is the world's largest and most widely recognized brokerage. A combination of the two will create a global financial services giant involved in everything from fixed-income trading to stock underwriting to credit card lending, which will rival Citigroup Inc., the biggest U.S. bank in terms of assets.
Strategically, most industry analysts are saying it's a good fit. If the deal goes according to plan, Bank of America will be able to offer Merrill's retail brokerage services to its huge customer base. There is not a great deal of overlap between the two companies - Bank of America does have an investment bank already, but it has never been terribly strong.
Where there is duplication, however, the combination of the two companies could result in more layoffs. Both Merrill and Bank of America have already cut thousands of investment banking jobs over the past year.
And the deal does not come without risks to Bank of America. Merrill Lynch, like many of its Wall Street peers, has been struggling with tight credit markets and billions of dollars in assets tied to mortgages that have plunged in value. Merrill has reported four straight quarterly losses, and its stock has been sliding.
At $29 a share, Merrill shareholders would get a 70 percent premium over the company's Friday closing stock price of $17.05. The stock has traded between $16.60 and $78.66 a share over the past 52 weeks.
This differs greatly from JPMorgan Chase & Co.'s buyout in March of Bear Stearns Cos., which was sold at a steep discount and with financial backing from the Fed.
"For BofA to step in and offer a premium strikes me as being imprudent. BofA could get a much better deal if they just sat and waited," said Ladenburg Thalmann analyst Richard Bove.
And Bank of America's own finances are far from robust. As consumer credit deteriorates, the bank has seen its profits decline, and the company is still in the midst of absorbing the embattled mortgage lender Countrywide Financial, which it acquired in January.
Major banks and brokerages met this weekend with government officials to try to formulate a rescue of Lehman Brothers Holdings Inc. The withdrawal of Bank of America, along with the pullout of Barclays PLC from the talks, raised the worry that Lehman might be forced to file for bankruptcy protection.
Many market participants believe Merrill Lynch - the first of the major financial services firms to oust its CEO after the credit markets seized up last year - might have been the next firm to lose the confidence of its investors, counterparties clients.
Lehman's shares fell a stunning 77 percent last week to $3.65 a share, but Merrill's also performed poorly, dropping 36 percent.
Merrill Lynch, whose current CEO is John Thain, is a more attractive takeover candidate to Bank of America than Lehman is because of its size, however, given its size and strong position in the retail market.
"This is the ultimate New York institution," said Jim Wilcox, professor of financial institutions at the University of California, Berkeley's Haas Business School. "Bank of America has had designs on Manhattan one way or another for some time." And while Merrill's books are far from clean, there is less uncertainty about its financial health.
"It's awfully difficult to get anyone to take on a fundamentally insolvent institution. And if that's the concern that people had about Lehman, it's a much tougher sale," Wilcox said. In July, Merrill sold its stake in financial news and data provider Bloomberg LP for $4.43 billion to raise capital, and then sold a huge chunk of its toxic asset-backed securities and issued new stock to raise another $8.5 billion.
Merrill Lynch, founded in 1914, has long been known for its independent spirit on Wall Street, with its army of 16,000 brokers globally nicknamed the thundering herd. It has also been nicknamed "Mother Merrill" because young traders are often nurtured and promoted through the ranks rather than going outside the company.
One such trader was David Komansky, who spent 35 years with the firm and was its CEO from 1996 to 2002. He rebuffed numerous offers through the years by banks looking to acquire the company, while many of his rivals consolidated. He retired from the company, and handed the reins to Stanley O'Neal - whom Thain replaced last November.
Bank of America's roots go back to the Massachusetts Bank in the late 1700s, but it was better known as a West Coast bank, having also evolved from the Bank of Italy, founded in San Francisco in 1904 by A.P. Giannini. A series of acquisitions including New England's Fleet Bank and then Bank of America's purchase by North-Carolina based NationsBank turned it into a bank with a more national presence. Although the combined company's headquarters moved to Charlotte, it retained the famed Bank of America name.
Merrill would instantly boost Bank of America's investment banking business, something that analysts would welcome. "At Bank of America, their investment bank never really dominated any product area. Merrill Lynch is stronger," said Len Blum, managing director at Westwood Capital LLC and former managing director of Prudential Securities Inc.'s investment banking group.
After a massive drop in the investment bank's earnings in last year's third quarter, Bank of America's CEO Ken Lewis said during a conference call: "I never say never. But I've had all of the fun I can stand in investment banking at the moment. So to get bigger in it is not something I really want to do."
The opportunity to acquire Merrill Lynch doesn't necessarily come at the best time.
It was just in January, that BofA agreed to acquire the troubled Countrywide Financial Corp. in a deal initially valued at about $4 billion. The Calabasas, Calif., mortgage lender was staggering under the weight of a surge in bad mortgage debt.
"Even though this probably is not the most convenient time to attempt to digest Merrill Lynch, this is surely too good an opportunity," said Douglas Peta, market strategist at J. & W. Seligman & Co.
Peta, who worked briefly at Merrill in the late 1990s, said BofA would be able to get Merrill's 49.8 percent stake in asset manager BlackRock, as well as Merrill's franchise of financial advisers.
And BofA has other types of businesses under its umbrella that have begun to worry Wall Street. In 2006, the bank acquired credit card issuer MBNA Corp. Some investors are worried that defaults on credit card payments will become another problem area beyond bad mortgage debt.
AP Business Writer Joe Bel Bruno contributed to this report.