JP Morgan Offer for Wachovia Makes Sense

Includes: BSC, JPM, STI, WFC
by: Todd Sullivan

This rumor makes a whole lot more sense than the previous one.

The latest rumor
has Jamie Dimon and JP Morgan (NYSE:JPM) making an offer for Wachovia (NASDAQ:WB). The deal makes sense for a couple reasons. Unlike Bear Stearns (NYSE:BSC), Wachovia is a bank with investor deposits. Dimon has made very public his desire to expand his banking franchise into the SE and a Wachovia deal would do just that.

While a deal would push the combined bank over the 10% threshold for deposits, I think it is not a very large stretch to suggest that Congress would happily raise that cap to avoid more banking problems and /or more Middle East and Asian investing in another US bank, should Wachovia need more capital.

The other option is SunTrust (NYSE:STI) bank. Two things make this deal slightly less appealing for Dimon. It is a far smaller bank that Wachovia (roughly 1/3 the size), so its eventual impact on JP will be less. It also trades at a valuation that is 40% higher than its book value, relative to what Wachovia trades at (.7 vs .5).

The valuation is a key point. By this metric Dimon could pay Wachovia shareholders a 40% share premium (this is just an example), which would easily get approval and get the bank relative to its book for a current market price of SunTrust. Wachovia shareholders would jump (leap) at the opportunity to get $24 and change (or shares) for their holdings and have it run by Dimon vs whomever Wachovia decides will be the permanent replacement for ousted CEO Thompson.

Will it happen? I think consolidation is inevitable and it has not really happened yet. Citi (NYSE:C) is out as a suitor, Bank of America (NYSE:BAC) is trying to deal with the Countywide (CFC) fallout and Wells Fargo (NYSE:WFC), I think, is just not interested in something the size of Wachovia. That leaves Dimon as the only real suitor.

What will he offer? I think far less than $24 a share and I think Wachovia shareholders will take just about anything at this point. If I am being honest, anything they offer to have Dimon in charge is better than just about anything Wachovia will eventually do anyway, so let go...

Disclosure: Long WB, WFC, C