Wachovia-Golden West Transaction: A Disaster Without Peer

The financial crisis has finally proved (if anyone needed more evidence) the sheer value-destroying power of large-scale M&A in financial services. The past ten years have seen one disastrous deal after another. You will have your own favorite: Travelers-Citigroup (C)? HSBC (HBC)-Household? Anything WaMu (WM) ever bought? Those are all great candidates. Each ended up costing shareholders billions foregone and diluted earnings, not to mention reputational damage on a grand scale. The credit crackup has only served to highlight how misbegotten those deals were.

But for unleashing pure, massive value evaporation, nothing compares to the champ: Wachovia’s (WB) $24 billion acquisition of Golden West Financial in 2006. That one didn’t just cost shareholders a large portion of their stake in the company, it evaporated it altogether.

Do you remember? On May 7, 2006, Wachovia said it would pay $81 in cash and stock for Golden West. That worked out to 3 times tangible book value, 13 times earnings, and a 15% premium to Golden West’s prior close. And for what? A $122 billion mortgage loan book (at a time when everyone in the world knew the mortgage cycle was peaking) and a retail network noted as much for its branches’ opulence as its inability to attract core deposits. For this, Wachovia forked over $14.3 billion in goodwill.

At the time, of course, few people expected Golden West’s mortgage portfolio to turn into the train wreck it became. Even so, doubts had already begun to simmer regarding mortgage-industry “innovations” such as subprime teasers and option ARMs. Few people doubted Wachovia was overpaying for Golden West in a big way. Which is why Wachovia’s stock went straight down the moment the deal was announced, and never looked back. In retrospect, the deal’s announcement marked the stock’s all-time high.

Wachovia’s market cap when the deal was announced: approximately $100 billion. Market cap now: $6 billion. Total cost of deal to shareholders, therefore: around $96 billion.

This wasn’t a case of bad luck or poor planning. It was a case of executive myopia, where management’s priorities (and responsibilities) were subordinated in favor of the relentless pursuit of size. We’ll be looking at other big financial service deals this week. All were disasters, but none as costly—or as obviously poorly thought out—as Wachovia’s Golden West folly.

Comments

[Ishortyou:]

Wachovia got rid off the prior toxic risky wasted bank subsidiaries and kept the good ones. Now it can start from scratch to build a new banking subsidiary with safe practice together with its remaining good outstanding subsidiaries. The current subsidiaries of Wachovia make it look like “Merrill Lynch without the toxic risky waste”, good job from management it separated the good bank from the bad bank overnight, plus its CEO Bob Steel is one of the top rated mutual fund managers. Wachovia will keep the valuable human resources and the talent that have expirience in the banking business saving them for the new banking subsidiary. Buying the municipal bonds or the auction rate securities will give the inflow of cash as long as its hold even to maturity. Some investors are taking money away from Hedge Funds going wild and putting that money into accounts manage by people that know what they are doing, Bob Steel is one of those people that know what they are doing, dont be surprise some of this money will go to Wachovia subsidiaries. Earnings will be adjusted accordingly, like simple arithmetics they will manage its expenses vs its earnings to come ahead in capital and start piling up cash (saving cash a hard job for most of us that live on debt), this new cash will give them the jump start of a new banking subsidiary without even thinking about to sell its remaining subsidiaries.Forgot to mention that Wachovia owns a hudge Insurance subsidiary which is making money and has sound book of business. Lehman debt is bonds most of them senior, as bankrupt as Lehman is those bonds get paid. ARS are Municipal Bonds as bonds they get paid, hold into maturity they get paid in principal, those ARS are cash flow. Preferred dividends will get paid accordingly because the holding company does not own the banking subsidiaries anymore so modification are going to be made. Getting rid off the toxic waste risky bank related subsidiaries is a good strategy and converting the remaining broker one to a new bank subsidiary with clean sheets is a good one too.

2008 Oct 01 07:00 PM

[infoplease:]

This may all be true but what about the Wachovia stockholder. Steel may be smart, he sure isn't honorable. He was putting out info the day before he started dealing to sell Wachovia about how strong we were and that everything would be Ok. As a long time shareholder I would have sold some of my stock if he had not gone on Jim Cramer and made such a good pitch and then put out the strong hold statement on WBs website right before he screwed the shareholders. If I had lots of money I would not go near anything Bob Steel has his hand in, I dont trust one word from the man any longer. Also, look who else got a good deal, not the stockholders but Ben Jenkins and several other Wachova croonies who were involved in the Golden West debacle. They are getting huge severances in the 13 millions and a job with Citi. This is exactly the reason I along with most other taxpayers do not agree with the Bail Out congress is pushing. No one is holding anyone accountable for this catastrophe that has destroyed companies and people's lives. Something is very wrong with our country and we need to do something about it beginning with voting out the politicians in office and voting in new faces. At least give someone else a chance.

2008 Oct 01 08:52 PM

[madasiwannabe:]

Shocking how all of these companies got in trouble. What's more shocking is how Wamu and Wachovia were given away for a song. Bank of America knows the 30 Billion they wrote down on purchase will be turned around and sold when the bill is passed. That means BAC made a 30 Billion profit for their trouble. Same with Citi. It's a shame the investors and shareholders got left holding the bag.

2008 Oct 01 09:02 PM

[User 273419:]

It was Wachovia's poor management style & inability to run a mortgage company that led it's demise. Golden West Financial was a great company that practiced conservative lending standards & had a lower deliquency ratio that most other banks. Wachovia did not know how to run a profitable business and grow like a normal firm. They would simply buy up other companies and use this for growth and expansion. The problem is that they were buying good companies and then trying to implement their own management style and business practices. Golden West Financial was the 2nd best performing stock on the S&P 500 for over 20 years. Berkshire was # 1. So, if you're buying a company based on it's performance and profitability, then why would you change it. Wachovia fired many senior executives at Golden West and put their people in charge of operations. At the end of the day, the ruined one of the most profitable and well-run lending instutions that we will ever see. Shame on them. I am not sad to see Wachovia fail, becuase they brought it upon themself. I am sad that thousands of hard working employees had to lose their jobs, and stock holders lost roughly 95% of their value over the past two years.

2008 Oct 01 09:53 PM

[Shafted:]

I for one am holding my stocks. L:iquidity is an issue but locking in a loss is another. I am hopeful that the Wachovia remnant can now begin anew without the weight of the junk mortgages. Perhaps new accquisitions or being accquired will work out better for us.

Since I am in Charlotte I geting the local rag, the Charlotte Observer. Today it asked if Ken Thomson is at fault for what happened. Well gee! He was the CEO at the time. What do think?

Additionally, it is my intent use my proxy to vote against this rape of the Wachovia stockholders by the Feds and Citigroup. I would like to urge everyone else to do the same, especially the institutional holders. It worked for Bear-Stearns stockholders. And a protest vote just might take some of the sting out of all this.

2008 Oct 01 09:58 PM

[Ishortyou:]

Steel was just hired on June 2008, the prior messed was created by the prior CEO, Steel had a plan to put the bank subsidiaries back on its feet unfortunately most of the people from the prior administration were trying to save their butts and misled Steel about their performance, telling that the bad loans were about 10b instead of 48 billion, now they got what they deserved the Citi management and they dont care who they are they will get fired on the spot.

2008 Oct 01 10:40 PM

[User 273445:]

Let me correct some misstatements. First of all Ben Jenkins had nothing to do with the acquisition of Golden West. He sold stock a few days before the acquisition as he was not involved nor did he know the deal was in play. Second, the Wachovia portfolio was and is performing better than the industry. The issue is the Golden West portfolio. Wachovia left the incompentent Golden West execs in charge of GW and also put them in charge of the Wachovia portfolio booting their own mortgage guys. They finally figured out the GW guys were out of their league and booted them. The vast majority of Wachovia is and has performed very well and would still be ok were it not for the GW portfolio and the liquidity crunch. Citi basically stole a great franchise and will do very well. Bob Steel is an honorable man, but with the Wamu failure and lack of a rescue plan from Congress, the credit markets froze and Wachovia took the hit. Very many innocent shareholders and employees were harmed but it was not the GW execs we need to feel sorry for.

2008 Oct 01 10:59 PM

[pedroperez:]

nothing compare to the aol-time warner deal

2008 Oct 01 11:30 PM

[pedroperez:]

nothing compare to the aol-time warner deal

2008 Oct 01 11:31 PM

[who:]

who is blame

Bush - policy on house ownership
Fed's - low interest rates,
Fed's (?) - poor mortgage structure,
Banks' - poor credit control,
Fed's - poor control over securitisation process

2008 Oct 02 12:34 AM

[User 273419:]

User 273445, you have absolutely no idea of what went on after Wachovia bought GW. You are completely wrong...and I know this because I was there. Wachovia took all of the power away from the GW execs and tried to change operations at the company. This is why most of the top execs at GW left the company...becuase they couldn't stand to see it run into the ground. If you're trying to tell me that Ken Thompson & his crew ran a great business.....you're kidding yourself. These guys were only out for themselves.

2008 Oct 02 01:45 AM

[Ishortyou:]

the problem starts when any management brings their buddies instead of bringing the elite knowledgeable human resources to handle the business.

2008 Oct 02 05:45 AM

[hunter:]

Every Wachovia Shareholder needs to vote no. Why should Wachovia give their bank to Citi. I doubt there are 42 billion bad mtg loans. probably more like 15 billion. Once the rescue package is passed Wachovia can put those bad non performing loans into the fund just like all the other banks will do. The price Citi paid is a hold up and rape of wachovia shareholders. At least if I am going to get raped I would like to be kissed!!! and I am definetly not being kissed.

2008 Oct 02 10:57 AM

[more inform...:]

oh please... conservative lending standards at GW? Hearing about neighborhoods in CA sitting empty due to GW creating "partnerships" with builders to sell new homes with a Pick-a-pay loans enabling buyers to get more home than they could qualify for with a conventional loan. Not to mention that none of the legacy GW folks want to comment on the fact that the garbage in the portfolio is loans that originated prior to the merger, using those "GW conservative lending standards". Maybe someone should investigate just what was going on at GW prior to merger, and explore the possibility that interested parties at GW could have presented their financial information inaccurately to others to facilitate the sale of GW. All these GW folks keep saying that Wachovia ruined them-- appears to me that Wachovia was doing just fine UNTIL GW came along.
In additon, the only thing bringing the "elite knowledgeable human resources to handle the business" would have done is allowed legacy GW staff to continue to hide what had really been going on for a longer period of time.

2008 Oct 02 12:24 PM

[ILongyou:]

This IShortyou 'investor' seems to be hurting much from the Wachovia stock collapse.... I have seen this exact same post cut-pasted on dozens of websites, forums and discussion boards. Its almost like he trying to spam his way back to profitability :) Its really funny... the desperation and denial that the game is almost over... and its not him that won. Pseudo-psychoanalysis: He probably also finds it VERY difficult to deal with losing in real life... and probably looks for everyone else to blame for his own failure.. hehehe

2008 Oct 02 03:37 PM