BofA shareholders approve Merrill purchase

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Bank of America Chairman and CEO Ken Lewis

Shares of Bank of America have taken a big tumble this year and have underperformed the broader S&P Bank Index.

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NEW YORK (CNNMoney.com) -- Bank of America shareholders approved the company's bold acquisition of Merrill Lynch on Friday, paving the way for one of the biggest mergers ever in banking.

Investors in the Charlotte, N.C.-based bank voted in favor of the deal at a special shareholder meeting Friday, after Merrill Lynch (MER, Fortune 500) shareholders approved the sale earlier in the day.

The historic tie-up, however, will prove to be yet another obligation for Bank of America CEO Ken Lewis to juggle.

From figuring out what to do with the money his Charlotte, N.C.-based company got as part of the government's bank bailout program, to ongoing efforts to integrate the troubled mortgage lender Countrywide, 2009 is shaping up to be a busy year for the industry veteran.

Few analysts have doubted the wisdom of the combination, particularly at a time when major financial institutions are failing at an alarming rate. Lewis is inheriting one of the nation's biggest investment banks and arguably the most well-known brand name on Wall Street.

But some worry that it will be a rocky start for this shotgun marriage.

"I think it is going to be quite challenging," said Nancy Bush, banking analyst at the New Jersey-based investment advisory firm NAB Research LLC.

There could be a culture clash from bringing together a long-standing Wall Street firm and a commercial bank, not to mention technology and personnel challenges.

When Wachovia (WB, Fortune 500) agreed to merge its retail brokerage network with the brokerage owned by insurer Prudential (PRU, Fortune 500) in 2003 for example, the new entity struggled to combine their technology platforms and also suffered an exodus of brokers.

But with Wall Street hemorrhaging jobs at an alarming rate, Bank of America appears as if it will hold onto at least the top earners that make up Merrill's 16,000-plus broker network worldwide.

A spokeswoman for Merrill Lynch said 99% of its top-rated brokers have agreed to retention packages, meaning they will stick around once the deal is finalized.

Still, reports have surfaced in recent weeks that significant job cuts are likely as a result of the combination of the two firms.

While the rest of Wall Street awaited the fate of Lehman Brothers the weekend of Sept. 14, Merrill Lynch CEO John Thain inked a deal with Bank of America's Lewis in an effort to save the 94-year-old brokerage giant.

The deal valued Merrill at $50 billion at the time. Bank of America shares have fallen 46% since then, putting the value on the merger at just under $20 billion. But some fear that even at that price, Lewis may be getting more than he bargained for.

Merrill Lynch still holds many soured mortgage-related assets on its books, which have tumbled in recent weeks due to weakened investor demand and plunging real estate values. That could ding Bank of America's future results.

Thain worked hard to scrub Merrill's books clean during his tenure, notes Christopher Whalen, managing director at Institutional Risk Analytics. But he warned there is no telling if Thain did enough to minimize losses, which could lead to additional writedowns for Bank of America.

"My sense is that Thain did a fair amount of remediation," said Whalen. "[But] Merrill still has a lot of exposure in terms of loans and securities."

Merrill, which was one of the biggest issuers of toxic securities like collateralized debt obligations, or CDOs, has lost more than $22 billion over the past four quarters.

If all goes as planned, Bank of America will complete its deal for Merrill Lynch by year-end, with the integration wrapping up sometime in 2010, according to some analysts' estimates.

But Merrill won't be Bank of America's only challenge.

Countrywide, which the bank agreed to purchase last January, remains a target of numerous lawsuits even after it reached a multi-state agreement with attorneys general offices in October over predatory lending practices.

At the same time, Bank of America still has a lot of work to do cleaning up the troubled mortgage lender's business operations, which could take at least another year, said Bush.

"It is a big headache, but at the end of the day BofA comes out as the largest mortgage originator and servicer in the nation," she said.

And of course, there's the economy to consider. Banks typically have to set aside money to cope with loan losses during a recession.

Bank of America has managed to ride out the current crisis better than many of its peers, helped in part by tough underwriting standards.

But given its nationwide footprint and giant exposure to such consumer-related businesses as credit cards, BofA could find 2009 to be pretty difficult, Whalen said.