When Bank of America announced last month that it was acquiring FleetBoston for $48 billion in stock, it was the third largest bank merger in history, promising to create a mega-bank that would span the country. But though bank executives promise economies of scale and cross-selling opportunities, investors have not been impressed. The day the deal was announced, Bank of America shares fell 10%. They have failed to recover, hovering around $74, down from the 52-week high of $84.90 in mid-July.


Is Wall Street missing something? Or is the deal a dud?


Wall Street may be especially skittish about Bank of America because of its involvement in the current mutual fund scandals. But most experts agree the merger is the prime reason the bank’s shares have fallen. “Strategically, it made sense, but financially, it was highly implausible,” says Richard Herring, professor of finance and international banking at Wharton.


The strategic move is to blend Bank of America’s operations in southern and western states with FleetBoston’s dominant position in New England. When combined, the bank will have some 5,700 branches in 29 states. It will be called Bank of America and will use that bank’s current headquarters in Charlotte, N.C.


Each bank is the product of a string of mergers in the 1990s. In the most recent deals, Bank of America merged with NationsBank in a $61.6 billion deal in 1998; Fleet Financial Group merged with Bank of Boston in a $16 billion deal in 1999, and with Summit Bankcorp in a $7 billion deal in 2000. Herring and many other observers feel Bank of America simply agreed to pay too much this time, offering FleetBoston shareholders a 40% premium to sell. Investors certainly feel that way: FleetBoston shares soared 23% the day of the announcement. They have continued to trade around $40, compared to the $31.80 close just before the announcement.


Wall Street is leery of high-priced deals given the trouble many acquirers have had digesting expensive targets. Indeed, Bank of America had a reputation for paying too much for many of its acquisitions in the 1990s, under then-CEO Hugh L. McColl Jr. The bank’s current CEO, Kenneth D. Lewis, has been seen as a stabilizing influence, but critics wonder if the FleetBoston deal means the bank is picking up old habits. “In the past, Bank of America did have a reputation for spending too much and not doing a very good job” absorbing its acquisitions, Herring says. One example was the merger with NationsBank in 1998.


Another major acquisition of a consumer-oriented bank is not likely soon, however. Regulations prohibit a bank from using acquisitions to gain control of more than 10% of the nation’s deposits, and this deal puts Bank of America close to that level. A bank can exceed 10% through growth. Bank of America could make additional acquisitions to build its corporate businesses like money management and investment banking. Lewis has said he would like to grow those businesses.


Many critics also don’t think FleetBoston is a particularly attractive acquisition. Despite its dominant role in New England, “in some ways FleetBoston is a fixer-upper,” Herring says. Under CEO Charles J. Gifford, FleetBoston has suffered a string of losses. “Fleet turned out to be a whole lot better at buying banks than running them,” Herring says.


The combined operation will cut costs by $1.1 billion a year, or 6%, the companies claim. But Herring says investors appear to be skeptical about how much saving can be achieved by a merger that essentially enlarges Bank of America’s market. It’s easier to cut costs when merger partners’ territories overlap.


Loretta J. Mester, senior vice president and research director for the Federal Reserve Bank of Philadelphia and a fellow at Wharton’s Financial Institutions Center, says the merger is “different from other [recent bank] mergers because it’s more consumer focused.” Ordinary depositors started to look more attractive to many banks during the downturn of the past few years, when there was less money to be made from investment banking, business loans and other high-end services to corporate clients.


Because consumer business involves lots of small transactions, it’s unlikely the merged company will be able to cut costs substantially in the front office operations that deal with customers, Mester says. But it may find significant savings in back office operations – by better computerizing record keeping, for example. “If it uses computers and it’s larger, that’s cost effective.”


Herring notes that Bank of America does have a reputation for good customer service, while FleetBoston does not. Hence, Bank of America may be able to build the New England business. “That’s one of the reasons you would be encouraged to think they might be able to carry it off,” he says.


Lewis has tried to promote the deal on the basis of cross-selling opportunities, in which customers who start with simple checking accounts later buy mutual funds and take out mortgages. Cross-selling is kind of the Holy Grail of financial services, but not many firms have been able to pull it off. It’s especially difficult in an age when customers can comparison shop with a few clicks of a mouse. Cross-selling “is hard to do,” Herring says. “And it’s also hard to import models from other markets.”


Nonetheless, says Mester, “core deposits are something banks relish,” partly because they tend to be stable revenue sources. Many banks, for example, used to charge customers for online banking. Then they discovered those customers tended to stay because of the hassle of moving accounts to other banks. Now many banks offer online services free to get new customers in the door.


Among the problems encountered in any merger, she added, is the potential clash of cultures. Mergers involve so many issues it is difficult to generalize about what makes some succeed while others fail, she says. “It is idiosyncratic. You really can’t determine what is going to be successful,” she says. One problem this merger is not likely to encounter, Mester adds, is antitrust scrutiny. While it will create the country’s largest bank, behind Citigroup, it will not reduce competition, since Bank of America and FleetBoston operate in different geographical regions.


Despite the hurdles, Herring says it’s way too early to write the deal off. “Bank of America has a lot of experience doing these mergers. Maybe it has a core competency now and has figured out how to do [these mergers] well,” he says. “I think that Lewis would have been cheered if he had acquired FleetBoston for $11 billion less.”