Wachovia

The country's fourth-largest U.S. bank has seen several tumultuous months around the two-year anniversary of its ill-fated $25.5 billion deal for Oakland, Calif.-based mortgage lender Golden West Financial Corp. The latest:

• Days after Citigroup Inc. ended negotiations with Wells Fargo & Co. over Wachovia Corp. and said it will instead seek damages, the Fed has approved a Wells-Wachovia deal. But now, will the new owner abandon Wachovia's investment bank? 
• The events follow Wachovia's agreement Oct. 3 to a $15.1 billion takeover offer from Wells Fargo, retreating from an agreed-to deal with Citi that had been brokered by the Federal Deposit Insurance Corp. The parties agreed to seek a brokered resolution with the FDIC.
  

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• Earlier in the week, it looked like Citigroup would be among the latest banks to benefit from the September turmoil that has reshaped Wall Street and rocked the market. Citigroup agreed Sept. 29 to acquire Wachovia for $1 per share, according to the New York Times, in a deal brokered by the FDIC, which was to give the FDIC $12 billion in stock, The Deal's George White explained.
  
• That deal came days after various news outlets reported talks between the two banks and days after early talks (revealed Sept. 17) between Wachovia and Morgan Stanley were said to be over, once Morgan was officially working on a stake sale with Japan's largest bank, Mitsubishi UFJ Financial Group.
  
• Amid a few tumultuous weeks on Wall Street, rumors indicated Wachovia was one of a few firms able and willing to take over Morgan Stanley. After Lehman Brothers Holdings Inc. filed for bankruptcy and after Merrill Lynch & Co. agreed to a $50 billion buyout from Bank of America Corp., Morgan Stanley and Goldman Sachs & Co. were the last independent investment banks standing (until they said they would turn themselves into commercial banks Sept. 21). As Morgan Stanley shares plunged, it became evident it might need a well-capitalized buyer to help weather the storm, The Deal's Lisa Lee wrote Sept. 17.
• Meanwhile, Wachovia's CEO Robert Steel has made a host of management changes since taking the top spot in July. The company's latest hire is J.P. Morgan Chase & Co.'s Kenneth Phelan as chief risk officer. He replaces Don Truslow.
  
• The news came shortly after Wachovia hired David Zwiener as chief financial officer, effective Oct. 1, who moves from Carlyle Group. He replaces Thomas Wurtz, who along with Truslow were the latest high-level departures at the bank in early August. Steel said at the time he didn't expect any further senior management changes.
  
• Meanwhile, as it works to offset losses, Wachovia may sell off noncore assets like its insurance business, according to a Reuters report Aug. 29 citing an analyst's notes based on Steel's coments a day earlier, but that it won't need to raise 'dilutive capital.'
  
• Along the same lines days earlier, the Wall Street Journal reported Wachovia had struck a $40 million deal with a joint venture headed by LandCap Partners to sell one-tenth of the land and construction loans it inherited from Golden West. The figure is far below the $350 million Wachovia intended to sell.
• Wachovia revised its second quarter results Aug. 11, saying it lost $9.11 billion on a possible settlement with regulators related to auction-rate securities, up from $8.9 billion it reported July 22. The ailing bank also said it would cut 600 more jobs for a total of 6,950.
• The news followed Wachovia's (initial) second quarter results reported July 22. The bank said it had a net loss of $8.9 billion in the second quarter, revealed it would slash its dividend by 87% to 5 cents per share from 37.5 cents, as the Wall Street Journal noted, to conserve $700 million per quarter, and unveiled plans to exit its wholesale mortgage lending operations.
• Just weeks before, Wachovia tapped Steel, who was until July 9 an undersecretary at the Treasury Department and is a former Goldman, Sachs & Co. vice chairman, as its new CEO. The Washington Post called Steel "one of the key architects of the Bush administration's response to the mortgage crisis," pointing out that he moves to run one of the banks badly exposed to it. Lanty Smith, who served as interim chief, will continue as chairman.
• The news came about five weeks after the company's board ousted Ken Thompson June 2, who as Wachovia chief executive drew fire for, among other things, the Golden West acquisition.
• According to reports June 25, Wachovia tapped Goldman Sachs Group Inc. to advise as it weighs options for its loan portfolio.
  
• The news came days after Wachovia was said to have enlisted Goldman for help in its CEO hunt, as the Wall Street Journal reported June 19.
• J.P. Morgan Chase & Co., which agreed to buy Bear Stearns Cos. for a pittance in March, was reportedly weighing an offer for the bank, according to a CNBC report June 20. (See Dealwatch: J.P. Morgan-Bear Stearns for more on that saga.)
• The bank in mid-April said it would raise $7 billion, alongside news it lost $393 million in the first quarter, and it planned to slash its dividend by 41 cents. Meanwhile, blogger and former analyst Henry Blodget went after Thompson, calling for his ouster.
• In November, Wachovia's president of general banking Ben Jenkins said the Golden West deal was ill-timed.

  The admission, Dealscape's Gerald Magpily wrote, was "the understatement of the year."

  Wachovia pulled the trigger on its biggest deal ever in [2006] just as the real estate market boom was inching toward a downturn. Inside Golden West's mortgage portfolio was a land mine of loans based in California's Central Valley and Inland Empire. When the bottom of the mortgage industry caved in a couple of months ago, Wachovia was caught in the avalanche.

• Ahead of his own ouster from Merrill Lynch & Co., former chairman and CEO Stanley O'Neal reportedly made a call, unapproved by the Merrill board, to Thompson to discuss a possible merger, The New York Times said in October. But a deal didn't look likely, Deal Journal noted, as Wachovia itself was still incorporating recent acquisitions Golden West and A.G. Edwards Inc. (Wachovia said May 31, 2007, it would buy A.G. Edwards for $6.8 billion, which was at the time the largest independent retail brokerage, as the industry consolidated, The Deal's Vipal Monga Donna Block noted.)

Meanwhile, Monga examined in June what really may have been at the heart of the Thompson ouster, the so-called last straw.

The expectation of worse to come for a bank hurt badly enough by mortgage market woes, especially after buying mortgage originator [Golden West] for $25 billion at the top of the market in May 2006, is understandable.

After all, market bottoms that were suddenly not bottoms at all have caused a continuing crisis among financial institutions that still hasn't ended. Wachovia's shares have been particularly hard hit, falling more than 50% over the last year, closing on June 3 at $21.92 a share. A year ago, the stock was trading at around $54. ...

One looming issue, however, may have been the proverbial last straw. Specifically, Wachovia could be on the hook for a substantial payout to Prudential Financial Inc. as early as July 1. That's when Prudential can exercise its right to put back to Wachovia its stake in a joint venture it formed with the Charlotte, N.C., bank in February 2003.

A RUN ON THE BANK

Meanwhile, Jefferies Group Inc., The Deal's Amy Wu wrote in November, had recently set up shop in Charlotte and lured several Wachovia bankers. The bank tapped Jim Walsh as head of consumer and retail investment banking. Walsh moved from Wachovia and brought three bankers with him: Grant Rice, a managing director focused on food and beverages, John Tibe, another MD who concentrates on food service, and food retail and Ryan Fisher, a food industries SVP. Fellow Wachovia banker Richard DiDonanto came on board as a managing director in consumer and retail leveraged finance.

THE TRANSACTION

The Wachovia-Golden West deal closed in October 2006, but ahead of its close, The Deal's Peter Moreira gave some ominous words in August 2006. The deal came nearly two years after Wachovia's $14.3 billion stock deal for Birmingham, Ala.-based SouthTrust Corp., a transaction in which it was hard to tell how well integration had gone, according to some analysts. Moreira wrote:

Convincing the financial community that the SouthTrust integration was carried out smoothly is essential to Wachovia now because there is so much concern about its latest deal, the $26 billion purchase of Golden West Financial Corp. of Oakland, Calif., announced in May. California is a new market for Wachovia, which is buying a mortgage lender at what is believed to be the top of a real estate cycle.

Indeed, some analysts were skeptical about integration from the get-go. California banks at the time of the deal were hot, and Wachovia wasn't wasting a moment grabbing them. The deal also looked like it could take the No. 4 U.S. lender into much closer competition with the three larger competitors: Citigroup Inc., J.P. Morgan Chase & Co. and Bank of America Corp.

BRANCHING OUT

Adding to its rapidly expanding West Coast holdings, Golden West was Wachovia's fifth significant deal in then-recent months as it has looked for ways to expand its presence in profitable niches and compete with the three largest lenders. As a result of the Golden West deal, 55% of the U.S. population would have access to a Wachovia bank, the lender said upon the deal's announcement. Other deals followed.

• In September 2005, Wachovia set its sights on Asia, taking the international banking arm of San Francisco-based UnionBanCal Corp. for roughly $245 million.
• On a particularly busy day, also in September, Wachovia more than doubled its consumer finance business as it moved into auto lending, taking Irvine, Calif.-based Westcorp Inc. and WFS Financial Inc. for $3.91 billion. Concurrently, Wachovia said it would pay $83 million for San Diego-based residential mortgage broker AmNet Mortgate.
• The bank on May 3, 2006 offered an undisclosed amount for Ameriprise Financial Inc.'s retirement record-keeping unit to expand its pensions business.

ELSEWHERE IN CALIFORNIA

Other California lenders drawing big prices and the Wachovia-Golden West deal also seemed to put others in play, Punk, Ziegel & Co. analyst Dick Bove noted.

• San Francisco-based Wells Fargo & Co. in May 2007 agreed to acquire East Palo Alto, Calif.-based Greater Bay Bancorp in a $1.5 billion stock deal, months after a $645 million deal for Sacramento, Calif.-based Placer Sierra Bancshares. "The bank sat back while its larger competitors Citigroup Inc., J.P. Morgan Chase & Co., Bank of America Corp. and Wachovia Corp. all bought aggressively in the early part of the decade," Monga and Moreira noted. "Now it is expanding in the West."
• In April, Seattle-based Washington Mutual Inc. agreed to buy Commercial Capital Bancorp of Irvine, Calif., for $983 million in cash.
• Portland, Ore.-based Umpqua Holdings Corp. agreed in February to buy Cameron Park, Calif.-based Western Sierra Bancorp for $355 million in stock.

Meanwhile, those eclipsing Wachovia were making deals, as well. And concurrent with Wachovia's 2004 SouthTrust deal, BofA's $46 billion purchase of FleetBoston Financial Corp. in late 2003 and J.P. Morgan's $56 billion deal for Bank One Corp. in early 2004, were transformative and dwarfed the deal that made Wachovia the top lender in the Southeast, Moreira noted in 2006. BofA and J.P. Morgan would, too, get involved in rescuing some lenders reeling from the subprime fallout.

THE FALLOUT

Wachovia's Golden West news met mixed reviews May 8, 2006.

• Some investors called the huge sticker-price risky and costly, others pointed to integration difficulties and message boards teamed with varied reaction.
• One Yahoo! poster looks optimistically ahead: "The two deals that WB did in California (Westcorp and now Golden West) have some of the best managements and operations in the industry. It is very difficult to see how, longer term, these deals won't work out very profitably. Yes, there will be arbitrage selling pressure, and the stock has traded poorly today. Two years from now the selling will be a small blip on a chart, and the company will have gained great positioning in a strong market."
• Others, fearing downgrades, urged shareholders to sell that afternoon.

Shares in Wachovia traded down 6.82% at $55.34 apiece, on the New York Stock Exchange late Monday, May 8, while Golden West shares traded up 6.17% at $74.86 each. Wachovia shares have dropped from the low 50s. They were trading in the high teens June 23, 2008.

Dealwatch executive summary
The Date	The Action
10.13.08 9.29.08 9.24.08 9.2008 8.29.08 8.20.08 7.22.08 7.10.08 6.25.08 6.20.08	Will Wells Fargo abandon Wachovia's investment bank? Citi grabs Wachovia. Then Wells Fargo does. Deal talks between Wachovia and Morgan Stanley are said to be over. Wachovia hires David Zweiner as CFO. Reuters: Wachovia may sell off noncore assets.   WSJ: Wachovia to unload some land, construction loans. Wachovia reports Q2 net loss of $8.9B and says it will exit wholesale mortgage lending. Steel is in as CEO.  Goldman will weigh in on Wachovia's loan portfolio. Is J.P. Morgan weighing a Wachovia offer?
6.02.08	Wachovia ousts Thompson.
6.2008	Is a Pru put the reason for Thompson's ouster?
6.2008	Wachovia is said to have hired Goldman Sachs.
4.13.08	Wachovia to raise $7 billion.
10.2007	Stan O'Neal called Thompson about a merger, the New York Times said.
11.2007	Wachovia exec says Golden West deal was ill timed.
5.31.07	Wachovia buys A.G. Edwards.
8.2006	Peter Moreira offers some ominous words on the Golden West deal.
5.09.06	Following on BofA's heels, UBS AG invests in Brazil with a $2.5 billion agreement to buy investment bank and fund manager Banco Pactual SA.
5.08.06	Some analysts are wary of integration difficulties between Wachovia and Golden West.
5.08.06	Other investors call the deal risky and too expensive.
5.08.06	The $25.5 billion Wachovia deal is the lender's largest-ever purchase.
5.08.06	Wachovia announces it will take Golden West Financial Corp., as it continues to expand its California holdings.
5.03.06	Signaling a focus on retirement and custody plans, Wachovia agrees to take Ameriprise Financial Inc.'s record-keeping unit for an undisclosed amount.
5.03.06	Wachovia announces a deal for home lender American Property Financing for undisclosed terms, calling it a purchase that would enable continued market share growth. Look out...
5.03.06	Wachovia Securities client Ameristar Casinos Inc. withdraws from the ongoing Aztar Corp. auction, possibly freeing up time for Wachovia to concentrate on its own dealmaking.
5.02.06	Wachovia competitor Bank of America Corp. agrees to unhand select Latin American operations for a $2.2 billion slice of Banco Itaú, Brazil's No.2 private sector lender.
4.23.06	Washington Mutual Inc. lands another hot California property, Commercial Capital Bancorp, for $983 million. (See related deal memo)
4.04.06	General Motors Corp. sells off a $10 billion, 51% stake in its GMAC to a team that includes Citigroup Inc.'s private equity arm.
2.08.06	Portland, Ore.-based Umpqua Holdings gets a California lender, paying $355 million for Western Sierra Bancorp.
9.22.05	Wachovia looks east and grabs UnionBanCal Corp.'s international banking business for $245 million.
9.13.05	Wachovia will branch out into auto financing with a deal to acquire Westcorp Inc. and WFS Financial Inc., in exchange for $3.91 billion.
9.13.05	Wachovia will take residential mortgage broker AmNet Mortgage for $83 million.
6.30.05	BofA takes MBNA for $35 billion.
4.05.05	Wachovia announces plans to take insurance brokerage and benefits firm Palmer & Cay Inc. for an undisclosed amount.
Source: The Deal, press reports

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