Poor Bank of America. Six years ago it scooped up mortgage-battered Countrywide Financial and Merrill Lynch at bargain prices. It’s been paying ever since.
Including last week’s deal with the U.S. Justice Department, the cost to BofA shareholders from regulatory settlements tops $50 billion. That figure doesn’t count the damage to the BofA brand, which was badly scarred by the misdeeds of the acquired banks. Could that damage have been avoided?
In its press release last week on the regulatory settlements, BofA was quick to point out that other guys did the bad stuff. Here’s first line of the second paragraph:
“The claims relate primarily to conduct that occurred at Countrywide and Merrill Lynch prior to Bank of America’s acquisition of those entities.”
Unfortunately, that fact was mostly ignored in the media coverage. CEO Brian Moynihan didn’t do media interviews or an investor call to emphasize that the bank inherited these problems rather than created them.
The deals have been a financial disaster for shareholders, so Mr. Moynihan’s reluctance to dwell on them is understandable. But by staying silent, he reinforced perceptions that BofA was involved in the worst excesses of the mortgage crisis. The bank never addressed that brand problem, and it has been a burden for its businesses and its management for years. Had BofA handled the post-acquisition branding differently, they might have avoided blackening the BofA brand.
If anyone had an interest in separating BofA’s past from its future it was Mr. Moynihan. He had little to do with the ill-fated acquisitions; they were the handiwork of his predecessor, Ken Lewis.
Ironically, until it bought Countrywide in 2008, Bank of America had been cautious about the mortgage business. As CEO, Ken Lewis was often heard to say that he “liked the product but not the business” of home mortgages. But Lewis pounced in early 2008 when Countrywide was weakened by the housing market’s collapse.
The Countrywide purchase was completed in July 2008. A few months later, BofA launched a mortgage lending push under a newly created brand, “Bank of America Home Loans.” Here’s what the April 2009 press release said:
“The Bank of America Home Loans brand represents the combined operations of Bank of America’s mortgage and home equity business and Countrywide Home Loans, which Bank of America acquired on July 1, 2008. The Countrywide brand has been retired.” (emphasis added)
With that, the Countrywide brand was kaput. The BofA brand adopted all of Countrywide’s problems. It was to be a costly decision.
Countrywide’s troubles were well known at the time. Media reports noted that the bank and its executives were subject to lawsuits and investigations by state and federal officials. All of that seemed reflected in the bargain price that BofA was paying, and analysts hailed the deal as a “bold move that’s indicative of the confidence the board has in the company and its management.”
Although the regulatory actions had yet to play out, they didn’t cause BofA to hesitate about putting its brand on the business. Indeed, the strength of the BofA brand was probably seen as the best way to market home loans after the deal. The bank calculated that consumers would embrace the BofA brand over Countrywide’s damaged moniker.
But this turned out to be a colossal misjudgment. The Countrywide mortgage litigation dragged on for years, scarring BofA’s brand every step of the way.
So what could BofA have done differently?
It could have retained the Countrywide name and re-launched it with a redesigned brand identity. Or it could have renamed its mortgage business entirely, if it judged the Countrywide name to be too damaged to salvage. (Like GMAC being renamed Ally Bank.) Either way, this “new Countrywide” would have signaled a fresh start for the company and created some separation from the parent.
In truth, distancing BofA from Countrywide would have been a tall order under any configuration. BofA was going to write the checks for these settlements, after all. And regulators, stung by growing criticism that they weren’t tough enough on big banks, were going to keep BofA’s name front and center in any enforcement action. Still, BofA could have tried a lot harder to remind people where the problems were. (Brian Moynihan should have practiced the words “legacy businesses” in the mirror every morning after brushing his teeth.)
BofA’s humbling experience might challenge the conventional wisdom in bank M&A that the buyer’s brand should always win out.
That thinking says the signage, advertising and logo of the old bank should disappear shortly after the deal closes, replaced by those of the new bank. There are some exceptions where the brand of the acquired company survives, such as when it has a strong position in a specialized market. Banks often have kept separate brands in private wealth management, for example. BofA, in fact, uses the U.S Trust brand (acquired from Charles Schwab in 2006) for marketing services to wealthy customers.
The impulse to rebrand after an acquisition can seem more like a victor’s conquest than a carefully considered strategy. Most marketing chiefs consider the efficiency (and effect on the CEOs ego) of having a single brand. Maintaining different brands can be costly, and marketers fear confusing the customer with multiple brands. There is also the enticing hope that by using a single brand, customers can be persuaded to buy more banking products. However, the evidence for such cross-selling is mixed, at best.
BofA’s ordeal with Countrywide is a reminder that blanketing the market with the buyer’s brand isn’t always the right approach. And in a world where regulators are likely to be aggressive and persistent, a troubled acquisition can stay toxic for a long time. Banks will need to be even more careful about how they use their name.