Acquisitions May Pay Off Long-term for Bank of America

Bank of America Corporation (NYSE: BAC) opened sharply higher as the markets applauded a Citigroup (NYSE: C) bailout package. The bank is considered to be one of the best performing among its peers thanks to careful money management and a series of acquisitions that could pay off handsomely in the future. Meanwhile, the bank’s recent fundraising efforts have yielded an additional $10 billion in capital that will be used to shore up its reserves and calm fears.

Bank of America acquired mortgage giant Countrywide and Merrill Lynch during the past year, which are two of the most influencial companies in their industries. Luckily, the bank was able to get a deal on both firms thanks to turbulent financial markets. The big question is whether or not Bank of America has enough money to keep the positions held by these firms running smoothly while the markets current themselves. If so, Bank of America shareholders may be in for a pay day.

The mortgages and securities held by Countrywide and Merrill Lynch may not be worth a lot now, but they could increase in value over the next few years. These long-term assets are subject to short-term pricing disparities thanks to mark-to-market accounting, which requires that the value be the current market price. So, even if a security is worth a lot of money (by taking the present value of its future cash flows), it isn’t worth a dime on the balance sheet if no investors want to purchase it. Fortunately, a recovery in the credit market will help these purchasers come back out to play.

Unfortunately, shareholders must deal with the pain in the interim period while a recovery takes effect. Last quarter, bank of America reported a sharp drop in its profits and cut its dividend to shore up capital reserves. Meanwhile, CEO Kenneth Lewis noted in a conference call that the U.S. economy slowed during the past 45 days and has no immediate prospects of getting better. In fact, unemployment is at a 16 year high while consumer confidence is near its lowest level in history.

Investors looking to take advantage of the upside potential of Bank of America without taking on all the risk of purchasing the stock may want to consider long-term options known as LEAPS. LEAPS enable investors to purchase the rights to upside on the stock while only paying a fraction of the cost of ownership. Currently, the $15 January 2011 calls are trading for just $4.90 a piece, which means that investors have the right to 100 shares at $15 during the next 788 days for just $490 down now!

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