Investors Monday expressed disappointment with Wachovia Corp.’s $25.5 billion takeover of California thrift Golden West Financial Corp., calling it risky and too costly.
The purchase gives Wachovia 285 new branches and its first significant presence in the fast-growing western United States. But it also increases the No. 4 U.S. bank’s exposure to mortgage lending, which many analysts say has peaked.
Oakland-based Golden West, the No. 2 U.S. savings and loan, is best known as an adjustable-rate mortgage lender, and has mortgage operations in 39 U.S. states. It operates branches as World Savings Bank.
“It’s a high price, and this adds more cyclicality to their earnings stream, which always puts downward pressure on its price-earnings multiple,” said Jim Russell, director of core equity strategy at Fifth Third Asset Management in Cincinnati, which owns Wachovia shares.
The purchase, announced late Sunday, values Golden West at $81.07 per share. That’s a 15 percent premium over Friday’s closing price, and 15.2 times expected 2006 earnings.
Golden West shareholders would receive 1.051 Wachovia shares and $18.65 in cash for each share.
Wachovia said the purchase will cut earnings per share by 11 cents in 2007 and 7 cents in 2008. It will take a $293 million charge and expects $53 million of annual cost savings.
The company plans to eliminate 1,100 jobs and 55 branches, and rebrand World Savings branches with the Wachovia name.
‘Crown jewel’
Wachovia Chief Executive Ken Thompson said the purchase would give his Charlotte, North Carolina-based company access to “high-growth, high-wealth” California markets.
“The only way I can describe Golden West is as a crown jewel,” Thompson said on a conference call. “We will do nothing to screw up that model.”
Adding Golden West would help Thompson make Wachovia a national bank, closer in size to Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co.
If the merger is completed as expected in the fourth quarter, Wachovia would have more than 3,400 branches, 5,300 automated teller machines, and $669 billion of assets.
Its bank franchise, now in 16 eastern and southern states, would reach 55 percent of the U.S. population.
Wachovia’s purchase also addresses Golden West’s status after the retirement of Co-Chief Executives Herbert Sandler, 74, and his wife Marion Sandler, 75.
“The question before the house is why in God’s name are we selling, and why are we selling to Wachovia?” said Herbert Sandler. “You can go just so far as a one-product company.... It’s time to offer the rest of the product line.”
The Sandlers took over Golden West in 1963. Their stake in the thrift is worth a couple of billion dollars, and they will become two of Wachovia’s biggest shareholders.
Herbert Sandler rejected suggestions that he sold Golden West because the mortgage lending business will weaken.
Yet Gimme Credit analyst Kathleen Shanley wrote that Golden West’s loan portfolio, 63 percent of which is in California, ”could be vulnerable in a prolonged downturn.”
Prudential Equity Group LLC analyst Michael Mayo downgraded Wachovia to “underweight” from “neutral weight.”
Gary Townsend, a Friedman, Billings, Ramsey & Co. analyst, downgraded it to “market perform” from “outperform,” seeing no ”strategic imperative” for the purchase.
Before the merger, Golden West shares had nearly doubled in the last three years.
Wachovia is “getting good merchandise,” said Mark Batty, an analyst at PNC Advisors in Philadelphia, which owns Wachovia shares. However, he said the purchase “dilutes Wachovia’s capital markets exposure as a percentage of revenue.”
The Mortgage Bankers Association expects industrywide originations to fall 40 percent this year from their 2003 peak. Analysts expect loan losses to rise from recent low levels.
Golden West may owe Wachovia a $995 million termination fee if the merger breaks down.
Wachovia entered California banking on March 1 when it bought Westcorp Inc. and its WFS Financial Inc. unit. In 2005, it bought San Diego mortgage lender AmNet Mortgage Inc. and an international unit of San Francisco’s UnionBanCal Corp.