Wachovia-Golden West Transaction: A Disaster Without Peer

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 |  About: Wells Fargo & Co. (WFC)
by: Vernon Hill

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 (NYSE:C)? HSBC (HBC)-Household? Anything WaMu (NYSE: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 (NASDAQ: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.