Buyout Not the Best Option for WaMu Shareholders

In this turmoil-filled market, takeover rumors are everywhere. But in the financial sector, takeovers are happening now. In the next few weeks, we will likely see consolidation on Wall Street.

With housing bottoming out, some banks look really cheap. The most imminent takeover is likely to be WaMu (WM). It has been on the agenda for some time now. Back in April WaMu refused an offer from JPMorgan (JPM). Recently the New York Post reported WaMu is on the top of the list that JPMorgan or another firm, such as Goldman Sachs (GS), is looking to acquire. Based on their sources, JPMorgan is talking to WaMu and other regional banks.

In truth WaMu is extremely attractive to JP Morgan as this will give JPMorgan  an opportunity to access a huge market in the wealthy West, especially California. So how much should WaMu accept as a fair value offer? It is a tough question, but it is not difficult to figure out how much WaMu is worth.

Recently WaMu claims to have increased liquidity to $50B from $40B, and they have further access to the Fed discount window if needed. Nobody knows when the bottom of the market will come, but with consumer confidence climbing for two consecutive weeks and home price month-over-month declines dropping by less based on Tuesday's Standard & Poor's/Case-Shiller 20-city index data, we can say the housing bottom is actually in, or at least not too far away. Now take a look at the value of WaMu. Based on its cash position, WaMu has around $12/share cash, and the stock price is merely $4.5. No wonder WaMu refused the first offer from JPMorgan. 

WaMu also claimed that no liquidation to current shareholders will happen. This sort of guarantee is never heard from other banks. I believe this gives WaMu another edge to move much higher from this price level. This could be a once in a lifetime opportunity for investors. Personally I don't think takeover is the better choice for shareholders. As the market turns around, WaMu will be trading in the $20-25 range easily.

Disclosure: Long WM and JPM.

Comments

[venividivici:]

I reckon you're dreaming but this market is demented so I suppose anything could happen.

2008 Jul 30 07:34 AM

[rusbear:]

Somebody is manipulating the stock price of WM, there is no other explanation for what is happening to the largest thrift in the countrywith daily access to all those savings accounts.

2008 Jul 30 08:39 AM

[muley101:]

Jim Cramer says WAMU is the worst run bank in the US. Ben Stein says WAMU is a 'beautifully run bank' and that he does not understand why people are not investing in it. I'd like to see a debate between these two on WAMU.

2008 Jul 30 09:08 AM

[User 116206:]

"WaMu also claimed that no liquidation to current shareholders will happen."....and you believe them?

And how many times has Thain stated that Merrill would not have to raise capital?

2008 Jul 30 09:27 AM

[saffman:]

At $4/share WaMu is a bargain for someone to invest their play money, not their retirement account. Whether it's acquired or allowed to grow independently it should come back. However, it would give a big bank like JPM the same jump-start exposure to the mortgage market much like Countrywide will for BOA.

2008 Jul 30 10:17 AM

[notsosmart:]

just more games.its vegas,slower & nobody brings a drink.lol

2008 Jul 30 10:52 AM

[tiredofallt...:]

Finally a decent article about WM from Seeking Alpha

2008 Jul 30 10:59 AM

[Bman:]

What blog is this? I'm confused.

2008 Jul 30 11:04 AM

[Kinabalu:]

WaMu, like most companies, has its good and bad points. Its bad points are really bad (its loan portfolio) and have gotten the most attention because of the huge loan loss provisions it's taking. But its good points are really good (its marketing, its book of deposit business and its fee income) and have been ignored by the market.

Anyone who thinks WM is a takeover candidate is dreaming. That possibility went out the window with its restructuring a few months ago. This bank has a real franchise and at todays prices is a real investment opportunity. There is risk, but also great potential for great return.

2008 Jul 30 12:47 PM

[bullsandbears:]

Let me begin by saying that rumors of a WM buyout are speculative and unfounded. Yes, Dimon would love to get his hands on WM. For nothing more than acquiring access to a major West Coast player in retail banking as well as exposure to the Florida markets. That would undoubtedly be a tremendous accomplishment of Dimon’s long term goal. WaMu has fought tooth and nail to remain independent and even at the cost of its shareholders, who have suffered tremendous loss and dilution. A brief history lesson takes us to a deal with TPG in a capital raise of 7.2 billion to shore up capital and remain independent in lieu of an offer from JPM for an all stock bid at $8.00 a share. Written into the TPG deal is the following:
“In the event that, within eighteen months of the closing of the transactions under the Investment Agreement, the Company (i) sells more than $500 million of common stock or other equity-linked securities at a price less than $8.75, or (ii) the Company engages in a change of control transaction wherein the implied value of the Company’s common stock is less than $8.75, upon the occurrence of each such event the Company is required to pay to those Investors whose shares are subject to transfer restrictions an amount sufficient to compensate them for the dilution suffered by them as a result of the above-described actions of the Company. “
Simple translation states that if they sell they will have to pay $500 million plus a difference in share price if sold within 18 months. TPG engineered this brilliantly insulating them from loss and making it a long term investment. In other words they aren’t stupid. They are in business to make money. Although many of us have our own opinions and do our own research, TPG would not have gotten involved in a firm that looked as risky as the media makes it out to be.

WM has fought tooth and nail to remain independent and try to weather this perfect storm. Based on current capital and liquidity levels and access to the federal home loans bank they have enough to emerge on the other side of this thing. Bruised, battered, beaten, and shook up? You bet but, independent and alive.

Does anyone know where the bottom of this thing is? No, they sure don’t but there are a lot of people out there that are a whole lot smarter than us that also know a whole lot more than us that look at it every day all day long. The housing market and write downs pertaining to foreclosures will inevitably decide the fate of WaMu. No one can be sure of what is to happen but all indications show that WaMu will make it through the tunnel to see the light on the other side.

So, stop with the rumor mongering. YES JPM would LOVE to buy WM but, it just isn’t going to happen by choice. The only way it will happen is if the housing market ends up even worse than it is and WaMu ends up not having access to or enough capital which isn’t likely.

2008 Jul 30 03:01 PM

[YOU MUST BE...:]

So the 250M(more or less) shorts who have not covered yet are either incredibly smart or incredibly stupid...Which is it?

2008 Jul 30 05:58 PM

[ladera166:]

My post on Yahoo on July 29. Same idea, more numbers.

July 29 -
WM Valuation Calculation Medium-Term


Current Book Value $13.3B
Less Add’l write-offs $8B
Projected Book Value when the
mortgage crisis is over $5.3B

It is projected that housing turns around
In early 2009. When housing stops dropping
foreclosures stop. Write-offs stop.

2005 & 2006 Earnings per year
(before the crisis) $3.5B

Outstanding shares 1.7B

Earnings per share $2.06 per year.

Stereotypical S&P Price/Earnings ratio 15 to 1

Projected stock value after crisis $30.90

Even risk adjusted, minority interest adjusted an offer
of $6 per share is laughable. One would expect $18-$22 per share.

Many small S&L’s may go under, but realistically not the largest in the country.
This company medium-term could be the biggest homerun of your investment career!

2008 Jul 30 09:18 PM

[jack matalka:]

Foreclosed mortgages are not a 100% total loss to the financial institutions. There are always assets like houses, apartment buildings, etc. These are valuable properties ( bad areas are immediately sold not carried on the books of most financials institutios) that have market value normally at 120% of the foreclosed loan. These properties are bank sold. Often multiple bidders are worked to bid up the sale price by brokers. Most are sold within 90 days of forclosure. Hey it ain't so bad!!!

2008 Jul 31 12:03 AM

[Old Trader:]

bullsandbear,

Didn't BSC "fight tooth and nail" to stay independent?...and where did that get 'em? I've got no stake, either way, (got stopped out at $34, with a small profit), but they need to get rid of Killinger and that ass-kissing BOD they've got.

old trader

2008 Jul 31 12:20 AM

[alivewweb:]

Question? How do they compute charge off? If they loaned 90% on a property now computed to be worth 50% less; do they charge off 50%? If so, seems very arbitrary.

Hot RE mkts cool off but the reasons these areas are desirable doesn't.

2008 Jul 31 12:21 PM

[E Nuff Sed:]

WM is selling for P/CF of below 0.5. P/B of 0.3.
WM earning model is likely permanently impaired.

I have some shares of WM I bought a $30. Do I want to throw good money after bad? Even though it is so tempting!

2008 Aug 03 12:25 AM

[MystikalRose:]

My family and I just came back from vacationing in California. Everytime I used my WaMu debit card to make a purchase I was asked by the person behind the counter if the rumor they heard that Wells Fargo wants to aquire WaMu to enter the East Coast market? I told them that I hadn't heard anything of the sort.

2008 Aug 03 04:56 PM

[topgk:]

Worst run Bank I think not has any one taken a good look at Capital One Bank recently????

2008 Aug 18 08:55 PM

[WaMu bad & ...:]

$20 to 25 EASILY, eh?

2008 Sep 26 12:11 AM