I'll make them an offer they can't refuse

When the Service Employees International Union recently made its objections to Bank of America's planned acquisition of Countrywide Financial Corp. known -- in letters to politicians and a dedicated Web site, BankofAmericaBadforAmerica.org  -- it's hard to imagine that BofA executives were quaking in their wingtips.

Despite the fact that SEIU can claim 1.9 million members, politicians on both sides of the aisle were relieved when Bank of America announced the $4 billion acquisition on Jan. 11. The worst case alternative put forward by analysts that follow the company was that Countrywide might have to declare bankruptcy if it were forced into a fire sale of assets. Not an event you want to be confronted with when you're trying to restore calm to panicky global financial markets.

But if some hedge fund in the Caymen Islands takes its case to the Securities and Exchange Commission, well, it may be time for BofA to scramble the lawyers and lobbyists. Especially if the hedge fund, SRM Global Fund, has quietly swept up 30 million shares left on the trading room floor by disillusioned Countrywide shareholders since November -- a 5.2 percent stake in the company.

SRM Global Fund -- which not coincidentally, is the largest shareholder in the British equivalent of Countrywide, Northern Rock Bank -- has different motives for opposing Bank of America's acquisition than the SEIU.

While the SEIU worries about the implications of still more consolidation in the banking industry for consumers (higher fees and interest rates) and a potentially huge tax break for BofA, SRM's concerns are simpler.

Now that SRM Global has a 5 percent stake in Countrywide, it thinks BofA should pay nearly three times as much for the troubled mortgage lender -- which would have a corresponding multiplier effect on the hedge fund's $200 million investment.

The all-stock deal agreement between BofA and Countrywide calls for Countrywide investors to receive 0.1822 BofA shares for each share of Countrywide, or about $8.20 a share, at today's closing price for BofA. SRM says Countrywide's book value is more like $20 a share. At least that's what they thought when they were paying $5 to $9 for them.

SRM says it will vote against the merger deal and is "very concerned by the movements in the company's stock price in the days before the announcement of the merger and intend to ask the Securities and Exchange Commission to investigate."

BofA already has a 16 percent stake in Countrywide, having provided the troubled lender with $2 billion in emergency funding in August, which it stands to lose if it walks away from the merger and Countrywide can't stay afloat.

SRM's Jon Wood, who founded the hedge fund in 2006, seems to see troubled lenders much the same way Don Fanucci views shopkeepers in The Godfather -- as easy marks to shakedown for his "protection" racket. We all remember what happened to Fanucci, don't we? SRM has tried similar tactics with Northern Rock, but shareholders haven't gotten on board (see Marketwatch story).

The simplest way for Bank of America to deal with SRM would be to pay it the protection money, upping its price for Countrywide so the hedge fund's investors will go away happy, but who knows? With BofA shareholders already suing the bank to stop the deal because they think it's a mistake, this might just be a convenient opportunity for BofA to back out.

In some ways, credit markets and the housing picture look worse than they did when BofA made the deal, so if there was little margin for error then, there can hardly be more now. 

On the other hand, SRM cites a damning excerpt from a recent Fortune article to make its case. The reporter, Shawn Tully, writes in a Jan. 22 article:

"Last Tuesday, I met with [BofA CEO Ken] Lewis at Bank of America's New York headquarters on West 57th Street, in a conference room boasting spectacular views over Central Park. During our talk, Lewis revealed his projections on the Countrywide transaction. As I suspected, they're extremely conservative, and even so, Lewis expects to recoup his investment so fast that, if he succeeds (in closing the deal), the deal will be a steal."

Lewis might have been trying to put a positive spin on the acquisition to win over dissenters, but that's exactly the kind of boast that would just perk the interest of Don Fanucci -- and make his successor, Don Corleone, feel very insulted.

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