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Wachovia to Buy A.G. Edwards, Creating #2 U.S. Retail Brokerage J Horowitz & V Bauerlein, WSJ 5-31 Wachovia Corp. agreed to acquire A.G. Edwards Inc. in a $6.8 billion deal that will create the second-largest U.S. retail brokerage in terms of advisors, with nearly 15,000, overseeing $1.1 trillion in client assets. The transaction is the biggest in a string of recent deals for regional brokerages, which are under pressure as larger rivals poach talent and better cope with falling commissions. It follows years of speculation about whether A.G. Edwards could maintain its independence and may spark similar speculation about other big regional brokerages like Raymond James. The deal would turn Wachovia into the second-largest retail brokerage in the U.S. behind Merrill Lynch & Co. Inc. if it retains all the brokers it seeks, surpassing Citigroup's Smith Barney. Wachovia has built its brokerage business relatively quickly, largely through acquisition of Prudential Securities in 2003. Prudential Financial Inc. continue to own 38% of Wachovia Securities, a position that Wachovia is expected to absorb within a few years, and said Thursday it supports the deal. The acquisition gives Wachovia a much bigger base to sell financial products, nearly doubling its number of its nationwide chain of brokerage offices to 1,512. It expands Wachovia Securities' focus on small investors, and gives it a much wider footprint, particularly in the Midwest. Wachovia and its rivals, are eager to ride the wave of aging baby boomers seeking wealth-management products as they approach retirement. Analysts said it remains to be seen how well Wachovia will do in retaining Edwards's best brokers, who now sell a wide variety of money-management products, that they can flourish under a big-bank structure. "The challenge for [Wachovia] will be AGE's complete open-architecture model, which puts brokers first," Mr. Hecht wrote. "Attempting to introduce more proprietary product will likely be a key cultural hurdle to overcome." If Wachovia retains Edwards' full force of brokers, it will emerge with 15,000 financial advisors and an increased presence in 48 of the 50 largest U.S. metropolitan areas. Integrating relatively independent regional brokerage forces into large organizations with more rigid sales schemes and often stingier compensation can be tough. But A.G. Edwards, in what many of its brokers considered preparation for a future sale, about two years ago tightened its own reins, dramatically reducing the percentage of commission and fee revenue kept by its brokers. It even forced clients to pay for postage of their monthly brokerage statements, a cost that may brokers reluctantly absorbed. Merrill Lynch held onto a much smaller group of brokers than it anticipated when it bought Advest in December 2005. UBS AG did better with its acquisition last August of Piper Jaffray Cos. financial adviser business, retaining almost 80% of the Minneapolis-based company's sales force. The agreement comes just over a year after Wachovia announced its $23.91 billion agreement to acquire Golden West Financial Corp., an Oakland, Calif., savings and loan devoted to adjustable-rate mortgages. Investors have penalized Wachovia shares, sending them down 8.2% since the deal was announced to $54.55 at Wednesday's close. Thompson swore off deals in the immediate wake of Golden West, but has signaled in recent months he was ready to do another. Wachovia reached its size and scope by a dizzying string of bank acquisitions over the past 25 years. Bank of America Cuts Mortgage Fees R Simon & V Bauerlein, WSJ 5-08 Looking to boost market share when loan demand has slowed, Bank of America has rolled out a no-fee mortgage aimed at home buyers. Under the program, Bank of America won't charge borrowers for loan applications, title insurance, appraisals and flood certifications or require them to get private mortgage insurance. Typically, borrowers who don't put 20% down must get mortgage insurance or take out a "piggyback" loan, which combines a mortgage with a home-equity loan. Borrowers must still pay some costs, including property insurance, property taxes, recording taxes and other "services voluntarily chosen by the customer," such as home inspections. The no-fee mortgage program is the latest effort by Bank of America to use what the bank calls "disruptive strategies" to gain market share in businesses where it has been relatively weak. Last fall, the bank eliminated online stock-trading fees for millions of customers with at least $25,000 in deposits. The bank, based in Charlotte, N.C., is the nation's sixth-largest mortgage lender, according to Inside Mortgage Finance. Bank of America executives say it is imperative to get more of existing customers' business, in part because a federal regulatory cap hampers its ability to grow by its traditional strategy of buying other U.S. banks. The typical mortgage customer has more than five other accounts with the bank and is less likely than other customers to switch lenders, says Floyd Robinson, president of the bank's consumer real-estate business. The no-fee loan is likely to be "a very attractive proposition for many cash-strapped home buyers," says Greg McBride, a senior financial analyst with Bankrate.com. "But it doesn't eliminate the need to shop around." In comparing mortgages, borrowers need to look at both the annualized percentage rate and the closing costs, he says. Closing costs average $3,024 on a $180,000 mortgage. Mr. Robinson says the bank's rates are competitive, "but we've never tried to compete solely on price." With its new offering, Bank of America is "trying to attack the most complex and anxiety-filled part of the mortgage process." Many borrowers complain they were hit with unexpected costs at the closing table. To qualify for the program, borrowers must have at least one account with Bank of America and obtain their loan through one of the bank's retail channels. The program doesn't apply to refinancings or to loans obtained through mortgage brokers. Bank of America introduced the no-fee program in Washington in September and rolled it out this February in eight additional states, including California, Illinois and Rhode Island. The bank says it has funded $1 billion of no-fee mortgages. Wells Fargo Solidifies Bay Area Presence with Greater Bay Purchase BizJournals 5-04 Wells Fargo & Co. said Friday it will acquire Greater Bay Bancorp for about $1.5 billion in stock, strengthening the San Francisco bank's market share while keeping the $7.4 billion bank out of the hands of competitors. "The transaction appears very reasonably priced and should offer Wells significant cost savings opportunities, as well as synergies between Greater Bay's ABD insurance subsidiary and its Acordia unit," said Joe Morford, an analyst with RBC Capital Markets in San Francisco. "Just as important, the deal helps keep out competitors looking to expand their footprint in California," Morford said. Greater Bay, facing serious headwinds in today's more difficult banking environment, was long rumored to be on the sales block. "The company has been struggling with margin pressures and relatively slow growth in its loan portfolio," said Dick Bove, an analyst with Punk, Ziegel & Co. Greater Bay said the company decided it was time to join forces with a larger rival. Analysts were quick to praise the deal, noting that it demonstrated once again Wells Fargo CEO Dick Kovacevich's disciplined approach to acquisitions. Wells Fargo negotiated a good deal for itself here," Friedman Billings Ramsey said in a research note to clients. "We discount the likelihood that any other acquirer will attempt to step into this transaction." Greater Bay also represents an attractive source of low-cost deposits for Wells, Morford said. "Given the tremendous branch overlap and the duplicate back office functions, there should be significant cost savings opportunities as well," Morford added. Wells Fargo's Mortgage Application Pipeline Soars Jed Horowitz, Dow Jones Newswires, 5-16 Despite the residential housing slowdown, Wells Fargo's backlog of new mortgage applications is up 19% this quarter, Chief Financial Officer Howard Atkins said Monday. The increase reflects more refinancing of mortgages because long-term interest rates continue to be historically low and because rates on long-term loans are lower than short-term rates, he said at a conference in New York monitored by Webcast. Atkins also said that in the bank's core markets, primarily in California, home purchases continue to generate "decent volume." The increase also may reflect slowly growing market share because mortgage brokers are directing more business to "strong providers" in the wake of a spate of bankruptcies from subprime mortgage originators. Wells Fargo is nevertheless fighting credit issues. Its $28 billion auto loan portfolio still has some issues due to previously low credit standards, and its home equity portfolio is showing "some deterioration" because of declining home values in much of the nation, Atkins said. The bank at the end of last year bulked up its auto-loan infrastructure by hiring more collection managers, installing a new collection system and slowing new loans, particularly to higher-risk borrowers. "Delinquencies have come down" as a result, he said. The company's residential mortgage portfolio, despite the growth in applications, also is being more tightly managed. It represents about 26% of Wells Fargo's total assets, down from about 30% through much of last year, due to tightened standards and smaller loans imposed during the first quarter to borrowers with weak credit histories. Credit Quality 'Great' Despite Delinquencies at Wachovia Jed Horowitz, Dow Jones Newswires, 5-16 Home borrowers at Wachovia are increasingly late in making mortgage payments, but the rise in delinquencies won't have a serious effect on credit quality, Wachovia Vice Chairman Ben Jenkins said at a conference Monday sponsored by UBS. However, Wachovia's $232 billion consumer loan portfolio is healthy overall and late mortgage payments won't translate into a high rate of foreclosures of loan writeoffs, he said. "We don't see anything near-term that concerns us regarding credit quality," Jenkins said in remarks monitored by Webcast. "We are in great shape." About 95% of Wachovia's consumer loans are secured, and 85% of its real-estate portfolio is secured by first liens. Consumer mortgages make up almost 47% of the bank's overall loan portfolio. Wachovia did not go overboard in the home-lending boom, he asserted, noting that its average residential real-estate loan equals 73% of a home's purchase price. Wachovia's pipeline of commercial loans, defined as those made to businesses with $250 million to $300 million of sales, is growing, he said, with "tremendous activity" in the Northeast, the Carolinas, Florida and Texas. "We are financing lots of expansion," he said. "I do believe we are taking market share." Will Hedge Fund Stake be a Nightmare for Citi's Management? Hedge Fund Daily, 5-17 Word that hedge giant Ed Lampert of ESL Investments has bought $782 million worth of Citi stock helped give share price a boost, but that’s not how the bank would have liked it to happen, and observers are suspect that Lampert will not just sit back and watch his investment grow. A hedge fund investor would wield influence with other shareholders to push for a change that could spell the end of the bank behemoth as we know it. Some are saying this is Citi’s worst nightmare. "The stage is set," wrote analyst Richard Pove of Punk Ziegel & Co. in a note to clients, reports MarketWatch. "The players have taken their positions and the game may be about to begin. It is unlikely that Mr. Lampert has taken a position of this size in Citigroup to only be a passive investor." Lampert, who now reportedly holds less than a 1% stake in Citi up from 0.3% as of March 31, may be hard to resist. The man with the billion-dollar-plus pay day last year has proved to be adept at turning dust into gold, such as his acquisition of Sears and merger with Kmart that has resulted in soaring share prices, and similar success with the purchase of Autozone. Citi is not expected to go lightly. Bank CEO Charles Prince already has announced a restructuring plan, which includes eliminating 17,000 jobs, in an effort to cut costs and quiet investor complaints. SunTrust is Selling Coke Shares Valerie Bauerlein, WSJ 5-17 SunTrust's relationship with Coca-Cola dates back to 1919. That's when the Atlanta bank took stock in the then-tiny soda maker as an underwriting fee for Coke's IPO. The secret Coke formula still sits in a SunTrust vault. But now SunTrust Banks has sold 9% of its $2.3 billion stake in Coca-Cola, and has said it will decide what to do with the rest by year's end. The move is meant to appease exasperated investors who see the Coke shares as an asset that SunTrust has been squandering for decades. Still, it could be too little too late to save SunTrust from a takeover long thought to be impossible. STI's sale of Coke could make SunTrust more vulnerable, because any buyer of SunTrust currently would have to include the market value of the Coke holding in the purchase price. Shedding the stock would make a takeover of SunTrust less expensive, and some analysts have long argued that the Coke stake amounted to a "poison pill" that kept SunTrust in control of its destiny. Coke's own fall from glory increases SunTrust's vulnerability. A spectacular rise in Coke shares from the mid-1980s to late-1990s made it far more expensive to acquire SunTrust. But management turmoil and marketing missteps at Coke have left its share price 40% below a peak of around $88 in 1998. For generations, SunTrust was regarded as the Tiffany of Southern banks. It had an enviable branch network in fast-growing local markets, a reputation for making loans that never went bad and a premium price-to-earnings multiple. Now, though, a growing number of investors and analysts are betting that SunTrust could soon be backed into a corner that leaves it no choice but to sell to J.P. Morgan Chase or someone else big enough to shell out more than $40 billion for the eighth-largest U.S. bank in stock-market value. "The clients who are holding the stock are the ones that believe there's going to be a deal," says Nancy Bush, an analyst at NAB Research, who has followed SunTrust closely for two decades. "It's very sad to me. This was once upon a time a great franchise." Ms. Bush, whose firm doesn't own shares but advises institutional investors who do, rates the shares a "hold." SunTrust's stumble partly reflects some big deals that got away. The company's conservative style caused it to be outbid in acquisitions of Barnett Banks and Wachovia, which instead helped catapult Bank of America and the former First Union, which took the Wachovia name, to near the top of the heap in sheer size. Leery about gambling shareholder equity on megadeals, SunTrust now finds itself stuck in the mushy middle: It isn't big enough to match the cost efficiencies and supermarket-style offerings of the titans, but is too big to provide highly personalized, community-bank-style service. A move to centralize operations across the Southeast under a single bank charter miffed customers and caused longtime bankers to quit. SunTrust disputes this characterization, saying instead that the bank runs an effective local model, with regional boards and local executives making decisions on pricing and credit. "It's still one of the best franchises on the planet," says Christopher Marinac, research director at FIG Partners LLC, a bank research firm in Atlanta. "You've got some of the best cities in the world in the SunTrust footprint. ... But the company hasn't executed on growing earnings like they could have." A shareholder return of 120% for the past decade is barely half that of SunTrust's 10 closest peers, calculates SNL Financial. As a result, the company's price/earnings ratio has hovered recently at a mediocre 14 on a forward basis, compared with 24 in 1998. SunTrust Chief Executive James M. Wells III, who took the helm in January, told analysts Tuesday that the Coke sale will fund stock buybacks, and that a stepped-up efficiency initiative will cut 10% of its current expense base. "We can and we will do better," he said. Executives maintain that the company can keep going it alone, but outsiders say evidence is mounting that selling out is one option being considered by directors. The board has lessened its hometown ties, with seven of 18 members hailing from Atlanta, far fewer than in the past. Agitating for change was Thomas Garrott, former chairman and CEO of National Commerce Financial Corp., a Memphis, Tenn., bank that SunTrust acquired for $7 billion in 2005. "Jim Wells is off to a great start in changing the focus and direction of the company," Mr. Garrott said. "He sees what needed to be changed, and I support that." Mr. Garrott rotated off the board last month, but as of March, he held more than 400,000 SunTrust shares and an additional 470,000 in trust for his children and in a company in which he is a general partner. SunTrust's top five markets, including Miami, hold more than half of the bank's deposits and have a projected population growth of 12.8% by 2010, twice the national average. J.P. Morgan Chief Executive James Dimon has said he wants to boost his bank's heft in the Southeast. But he would likely be reluctant to enter a bidding fray that would drive up the price. When a J.P. Morgan investor griped at the bank's annual meeting about its lack of bank branches in Florida, Mr. Dimon was quick to agree. "Believe me, we would love to be bigger in Florida," he said. He declined to speculate about potential acquisition targets. Of course, trying to predict the next big bank takeover is a fool's game, and more than two-thirds of the Wall Street analysts following SunTrust are recommending that investors steer clear of the stock despite the hype. John McDonald, an analyst at Banc of America Securities, says the new CEO at SunTrust is getting a "fair shot" to turn the company around. In the long run, though, "there's a good likelihood they'll be part of a larger organization," he says. Mr. McDonald rates the shares a "buy." Banc of America Securities has done investment banking for SunTrust. Ratings Changes On 5-18 Punk, Ziegel & Co Downgraded BK from Buy to Market Perform. On 4-13 Stifel Nicolaus Initiated coverage of BAC at Hold, Initiated WB at Hold and Initiated WFC at Buy. On 4-12 Deutsche Securities Initiated coverage of BAC at Hold , Initiated BK at Buy, Initiated C at Buy, Initiated JPM at Hold, Initiated KEY at Sell, Initiated MEL at Buy, Initiated PNC at Sell, Initiated STI at Hold, Initiated TCB at Sell, Initiated WB at Hold and Initiated WFC at Hold. Home Page Factoids Previous Update |