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The Worst Financial Services Deal Of The Decade
The Wachovia-Golden West transaction was a disaster without peer

Vernon Hill ( about me )
Posted 09/30/2008
bankstocks.com
vhill@bankstocks.com

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? HSBC-Household? Anything WaMu 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 $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.

What do you think? Let me know!

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Comment:

badger Posted On 9/30/2008 12:44:29 PM

When the Sandlers sold to Wachovia in '06 there was much written here in N. California about what shrewd business people they were, with speculation that their sale was a good indication that real estate was likely to take a dump soon. How sharp they were to retire when they did.

cg Posted On 9/30/2008 1:48:00 PM

Actually the shrewdness had been long documented...but apperantly not fully weighed by Wachovia. They could have cashed out many times over a long career. Wachovia should have seen this as red flag #1.

bill_az Posted On 9/30/2008 1:56:01 PM

Ah, yes, the salad days when you didn't need to verify your income, pay principal for 5 years or prove that you weren't buying property for investment purposes. Why didn't someone--maybe an investment banker, maybe an OCC executive, maybe anyone--sit up and noticed that the second largest mortgage lender in the United States (Wells Fargo Bank) refused to write a single option ARM? True, they did push the home equity line like is was greenback meth, but come on, people. And when I worked at U.S. Bank, they barely even originated mortgages, and then only through a direct purchaser like Nationwide. So two of the ten largest banks in the country thought all this junk was risky. And now we've got a Legislative and Executive branch who not only haven't kept up to control the problem, I doubt any of these poltroons could explain how credit markets function (let alone seize up), as witnessed by the sheer stupidity of those that chose to 'splain themselves on national television.

Tom Posted On 9/30/2008 2:19:22 PM

If anything these events take the bloom off the Herb and Marion Sandler rose. Always portrayed in the press as the most conservative and competent managers in the industry, this disaster was created on their watch. I don't consider "shrewdness" an admirable quality when it goes hand-in-hand with a lack of ethics or prudent judgment. I have no interest in Wachovia's plight (if anything I benefit from their debacle) but I would be very pleased to see the Sandlers' asses sued off by Wachovia shareholders. One question: where were those "opulent" branches Vernon speaks of? I've lived my life in the S.F. Bay Area, their home market, and worked with several ex-Golden West employees over the years. I've never seen a World Savings branch that would come anywhere close to being opulent, and they had a reputation for being among the most frugal, tightfisted organizations around. I think they were the last branch network of any significant size to install ATMs, in the late '90s.

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