JP Morgan Offer for Wachovia Makes Sense

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

The latest rumor has Jamie Dimon and JP Morgan (JPM) making an offer for Wachovia (WB). The deal makes sense for a couple reasons. Unlike Bear Stearns (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 (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 (C) is out as a suitor, Bank of America (BAC) is trying to deal with the Countywide (CFC) fallout and Wells Fargo (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

 

Comments

[miamistorm:]

Sounds like Todd bought some WB after the rumor of a JPM Chase possible buyout on the hope of a $24 offer. I'll bet you watch too much CNBC and I'll also guess that you had owned YHOO at one time and was burned by the Microsoft 'buyout' too. There's no deal happening here either as JPM Chase has too many subprime and other debt issues on their own balance sheet to take on WB's as well.

2008 Jun 24 06:46 AM

[fatcat:]

I wonder what role the Fed has in encouraging consolidation.It would be easier for them to prop up a few larger institution,and would prevent the panic that comes with a larger bank like WB going bust.

2008 Jun 24 07:37 AM

[Echo To All:]

these rumors were flying for a few months, and now it is getting a lot more attention. but WB has been an acquirer over the years, hence do not see them being bought out. also, if JPM is primarily looking for retail operations in the SE, WB has a lot of other businesses JPM would need to divest. (the deal would seen complicated and costly)

i think jpm needs to stick to a smaller player focused in the SE. (i'm actually waiting for this rumor to be squashed so I can buy jpm... i don't want them to buy WB just yet due to the Gold West mortgage exposure. Don't know if those problems are out of WB yet.)

2008 Jun 24 08:30 AM

[wildeyed:]

HSBC would be another possible contender.... and Santander used to have an interest in WB (from the FTU days).
In the past (b4 retiring from the banking sector), the Fed did a lot of "encouraging" to get needed mergers going. That said, don't think WB is in danger of going bust. Spend time on the SEC filings -- even if you discount asset values heavily in your analysis, there is some meat left and pretty broad revenue base from multiple product lines. Not saying you'll see a big recovery any time soon but I don't think you'll see failure either.

2008 Jun 24 08:30 AM

[Prudent Man...:]

Buying Wachovia would just be an ego move against Sandy Weil. JPM would be just a payback. Economically, the industry is dead money. We are seeing more of these corporate executives using stockholder's money to further a personal agenda, regardless of whether it is value additive.

Unfortunately for the taxpayers the politicians, to protect their sources of political contributions, are trying to sell the "too big to fail" nonsense. If it is too big to fail, it is too big. We lost many big companies such as Packard Motor, Studebaker, Continental Illinois, etc. and seem to do quite well. If the consumer doesn't buy from one they will buy from another and if an employ gets laid off by one they will work for another. The upside is that the fat is partially removed from the executive suite, where all these problems evolve from.

2008 Jun 24 08:45 AM

[Chemist29:]

Why 24$? why would Wachovia shareholders accept anything, if book value after 30 billion in writedowns is still 36, why would the shareholders accept 2/3rds of book value. This isn't BSC, wachovia wont collapse and doesn't need a buyer.

2008 Jun 24 10:10 AM

[fatcat:]

Wb hired Goldman to advise them,according to the Charlotte Observer this morning.Todd,you may be spot on again..I bought the june 20s yesterday,they are up a bit today with good volume..

2008 Jun 24 11:32 AM

[User 143885:]

Are you serious? Wake up...no way JPM can swallow WB right now....NOT HAPPENING.

2008 Jun 24 12:28 PM

[fatcat:]

sold my wb calls for a small profit and picked up mer puts.That probably means there will be an offer for wb,since i tend to be a contra-indicator!

2008 Jun 24 12:57 PM

[tom123:]

There is no way the WB/JPM deal goes through. JPM has its hands busy with the Bear consolidation and generating business in an increasingly difficult market. I do not think it will be willing to undertake the headache of tailoring and executing the WB deal. HSBC, Santander or even Barclays is in better position to digest the bank.

2008 Jun 24 01:05 PM

[fatcat:]

Nobody else believes it either,Tom..I held the 20 call for a day,the stock moved a dollar and the option only moved 10c....

2008 Jun 24 01:14 PM

[charlottemom:]

Think SunTrust is the better buy. Isn't as big as Wachovia in SE, but doesn't have a "Golden West" problem.

2008 Jun 24 02:41 PM

[Stockguy456:]

I agree Suntrust would be better

2008 Jun 24 09:54 PM

[WBalumni:]

WB/FTU has always been a strong and successful operational entity with generally good management, but its senior decision makers have regularly fallen prey to their own need to "hit a home run" and "don't miss the train" insecurities. Unfortunately, executive management long ago fully bought into the accounting treatment that allowed the immediate recognition of revenue through securitization and sale of assets. I would venture to guess that an insider had developed models to move the Golden West portfolio profitably before the GW purchase and certainly before the sub prime melt down. They forgot the lessons from "The Money Store" purchase and took confidence in the over heated collateral values of GW's "Pick-a-Pay" portfolio. Live by the sword, die by the sword (i.e., mark to market accounting). However, this illiquid market will pass and the value of the loan portfolio, while not completely, will recover. $24 bucks would be a bargain for this franchise.

Regardless, WB needs a strong, independent executive that will call "bull" on short term revenue schemes and stick to the banking businesses that provide steady returns. Dimon certainly would fit that bill.

2008 Jun 25 07:58 PM

[bankerbillb:]

The Fed wont move on the 10% threshold, why would they? WB shareholders would be open to $24/share if they believed Dimon would take them back to the day of $50+ but big bank mergers NEVER seem to work out the way they are presented on paper. Only way this deal gets done is at a discount price, WB sells off a lot of deposits and branches, and the integration is well planned and executed.

2008 Jun 26 08:16 AM

[Mtg Professor:]

Having been in many offices that did more than their fair share of PAy Options ARMS when they had no business doing them I can tell you the truth about how many of these loans are doing into default will not be held back forever. When the s*it hits the fan watch out below.

2008 Jun 26 12:52 PM