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Stocks Slip After Wachovia Deal: Values Traditionally Dip After a Major Acquisition; the Bank and Some Analysts Hold Firm on Potential

Posted on: Wednesday, 10 May 2006, 06:00 CDT

By Rick Rothacker, The Charlotte Observer, N.C.

May 10--Wachovia Corp.'s stock faltered again Tuesday, continuing the traditional slide that hits banks after they make merger announcements.

The Charlotte bank's shares fell 6.68 percent Monday -- its biggest one-day plunge since October 2002 -- after Wachovia said it was buying California-based Golden West Financial Corp. for $25.5 billion. With Tuesday's 1.47 percent drop to $54.61, the stock is down 8 percent for the week.

A number of analysts have downgraded the stock or cut profit estimates, worried about a hit to earnings per share, increased exposure to the mortgage business and a difficult integration. Others have held firm, citing the long-term potential for the deal, which gives Wachovia its first major West Coast presence and bulks up its mortgage business.

Although Wachovia has openly coveted California operations, the timing and price tag for Sunday's merger announcement caught some shareholders off guard. The stock last month reached a 12-month high of $60.04 and the bank's recent deals had been mostly small.

Sandler O'Neill analyst Kevin Fitzsimmons on Tuesday downgraded the stock to "hold" from "buy," predicting a down period like the stock experienced after Wachovia's 2004 SouthTrust Corp. acquisition.

"Our sense is that the stock will probably tread water for the next two to four months, at least until investors gain incremental comfort about the increased exposure to the mortgage business," wrote Fitzsimmons, who has a $60 one-year target price.

Other analysts, however, were more upbeat. Mark Hekeba, analyst with Standard & Poor's Equity Research Services, maintained a "buy" rating, calling the acquisition reasonable.

"This deal would give (Wachovia) a national presence with significant branch additions in the key markets of California, Florida and Texas," he wrote in a report this week, keeping a one-year target price of $67.

If past experience holds up, Wachovia shares could recover in a few months, particularly if the deal proceeds smoothly. Wachovia's stock dropped 4.21 percent June 21 after the bank announced its $14.3 billion acquisition of Alabama-based SouthTrust. By August, it had overcome the loss.

Charlotte-based Bank of America Corp. experienced an even bigger drop in October 2003, when its shares tumbled 10 percent after the bank debuted its purchase of FleetBoston Financial Corp. The stock returned to pre-merger levels by January 2004.

Wachovia Corp. Chairman Ken Thompson has long expressed frustration that Wall Street depresses his stock because of worries about future mergers. After announcing his biggest deal ever this week, he has worked to assure analysts that he is a disciplined dealmaker whose acquisitions will reward existing shareholders.

Asked about the stock drop Tuesday, Wachovia spokeswoman Christy Phillips said the acquisition was compelling for financial and strategic reasons. "We're focused on the long-term performance of our stock, not the performance in the first couple of days following the announcement," she said.

Shareholder Rich Michalec, a Charlotte retiree, said he's not panicking but is disappointed with the big drop.

"People who invest in financial stocks are conservative in the first place," said the 62-year-old former IBM Corp. employee, who owns 500 shares. "Anytime they take existing funds and put it in a new venture, it's a risk."

Other shareholders were still mulling what to do. "I am not an enthusiastic backer of everything they do," said Richard Whitten, a veterinarian in Carrollton, Ga., who said he owns a "substantial" amount of the stock. "I'll have to see how it goes." Big Falls

Here are the biggest one-day drops in First Union/Wachovia shares since 1995.

-- Nov. 14, 2000:

-8.73 percent

-- May 25, 1999:

-8.64 percent

-- Jan. 27, 1999:

-8.54 percent

-- April 14, 2000:

-8.19 percent

-- Sept. 17, 2001:

-7.24 percent

-- Oct. 3, 2002:

-7.24 percent

-- Oct. 5, 2001:

-7.04 percent

-- May 8, 2006:

-6.68 percent

Source: SNL Financial

Earnings impact

Acquisitions add more outstanding stock at a company, potentially "diluting" future profits per share.Wachovia has said its Golden West Financial acquisition will reduce earnings per share in the short-term, but prepare the bank for better long-term growth. According to bank projections, the deal will reduce estimated operating earnings per share by 11 cents in 2007 and by 7 cents in 2008. The impact will be neutral in 2009.

Wachovia expects the deal to close in the fourth quarter of this year, pending shareholder and regulatory approval.

Wells Fargo

Wachovia's planned acquisition of Golden West Financial would bring the bank more on par with San Francisco-based rival Wells Fargo & Co.

Wachovia is already the No. 3 bank in deposits and No. 4 bank in assets, one notch ahead of Wells, but it trails in other key rankings: market value and profits.

A combined Wachovia/Golden West would have had a market value of $110.7 billion as of Tuesday's market close, a little behind Wells at $114.6 billion. As for profits, a combined Wachovia/Golden West would have made $8.08 billion in 2005, compared to Wells' $7.67 billion.

Asked about the comparison, Wachovia Chairman Ken Thompson Monday said Wells is one of the peers he looks at, but added: "We are more focused on growth than size."

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Copyright (c) 2006, The Charlotte Observer, N.C.

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Source: The Charlotte Observer (Charlotte, N.C.)

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