Ken Lewis strikes again

NEW YORK (Fortune) -- When others get fearful, Bank of America chief Ken Lewis finds opportunity.

The collapse of Lehman Brothers Sunday night sent a wave of fear through the financial markets. But for the second time this year, Lewis, the CEO of the nation's biggest bank by market capitalization, took advantage of what he called "unprecedented" turmoil to make a stunning acquisition - in this case, the stunning $50 billion all-stock agreement to buy Merrill Lynch (MER, Fortune 500).

The Merrill deal, struck Sunday evening after Bank of America (BAC, Fortune 500) declined to make a bid to rescue Lehman, comes just two months after Bank of America closed its $4 billion acquisition of troubled mortgage lender Countrywide.

Lewis unveiled that deal in January in the midst of an earlier panic in the markets.

But the acquisition of Merrill, with its global wealth management business and huge team of brokers, dwarfs the Countrywide agreement in its transformative effect.

The Merrill-BofA agreement combines the second-biggest U.S. bank in terms of assets with the No. 3 investment bank.

Beyond its substantial brokerage and investment banking operations, Merrill also holds a 49% stake in BlackRock (BLK, Fortune 500), the New York-based investment manager that has emerged as one of the few financial-sector winners in the grinding credit crunch that started last summer, by taking commissions from troubled firms to dispose of toxic assets.

Merrill "is an ideal fit" for Bank of America, Lewis said Monday, creating "a company unrivalled in its breadth of financial services and global reach."

Wall Street was skeptical, sending Bank of America shares down 15% in early trading Monday.

Marc Faber, a former managing director at Drexel Burnham Lambert and now an investor known best for his doubts about the health of the dollar, said on Bloomberg television Monday that with BofA boasting a market capitalization six times as large as Merrill, a selloff in BofA paired with a rally in Merrill amounts to a substantial net negative for the markets. Merrill shares rose 24% in early trading Monday.

S&P cut some of its ratings on Bank of America's debt Monday, citing rising residential housing risk tied to the Merrill deal, and said it may change ratings further as conditions warrant.

Moody's put BofA's ratings on review for a possible downgrade.

The price of insuring against a possible default on BofA debt rose more than 30% in early trading Monday, reflecting heightened fears that the bank could face outsize mortgage losses following the purchases of Merrill and Countrywide.

But Lewis said he was looking well beyond the next trading day in weighing the appeal of a Merrill acquisition. He said the biggest attractions in the deal were the prospect of building BofA's global reach - Merrill is stronger in Europe and other foreign markets than BofA - and the opportunity to serve the so-called mass affluent customer, the upper-income earners who are expected to pour billions of dollars into wealth management accounts in coming decades.

"We will finally have enough financial advisers to take care of that opportunity," Lewis said Monday.

Lewis' latest bold move comes as worries about plunging asset values sweep the financial markets. Merrill shares plunged 12% Friday and lost a third of their value last week as it became apparent that Lehman Brothers (LEH, Fortune 500) and perhaps other financial firms were in desperate need of fresh cash.

The free fall of Merrill shares had some analysts wondering why BofA was willing to pay a 70% premium to Merrill's closing stock price Friday.

Lewis answered that he believed the free fall of Merrill's stock last week created a rare opportunity to buy into a premium franchise at what he considers a low price - around 1.8 times Merrill's tangible book value, a measure of the net value of the firm's assets. BofA finance chief Joe Price noted that the deal price offers Merrill holders a 29% premium to the stock's average price over the past week.

What's more, Lewis said he didn't want to "roll the dice" and have some other player come in and make an investment in Merrill that would preclude an acquisition down the road.

Despite the plunge of its shares and the issues CEO John Thain has spent the past year dealing with - Merrill has taken more than $40 billion in writedowns, and raised more than $30 billion in new capital - "Merrill had the liquidity and capacity to see this through," Lewis said Monday. He said a standalone recovery at Merrill stood to be "not necessarily easy, but more likely than not."

Lewis said that as in the Countrywide acquisition, BofA plans to make the Merrill acquisition work in part by cutting costs. BofA said it expects to recognize $2 billion in cost savings in coming years, and Lewis scoffed at the notion that the company's projections could be overstated.

"We're good at this," Lewis said of wringing cost savings out of acquisitions. "This isn't the first time we've done this."