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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-OLD). 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


Source: JP Morgan Offer for Wachovia Makes Sense