Investors on Monday expressed skepticism about Wachovia Corp's $25.5 billion take-over of California's Golden West Financial Corp, calling the transaction risky and too costly.
While the purchase gives Wachovia, the No 4 US bank, a significant presence in the fast-growing western United States, it also expands the bank's exposure to mortgage lending, a sector that analysts say has peaked for now.
"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, calls for Wachovia to pay $81.07 per share for Golden West, a 15 percent premium over Friday's closing price. Golden West shareholders would receive 1.051 Wachovia shares and $18.65 in cash for each share. A closing is expected in the fourth quarter.
In morning trading, Golden West shares rose $5.49, or 7.8 percent, to $76.00, while Wachovia tumbled $3.36, or 5.7 percent, to $56.03.
Oakland-based Golden West, the No 2 US savings and loan, operates 285 World Savings Bank branches. It is best known as an adjustable-rate mortgage lender, with conservative lending standards, and has mortgage operations in 39 US states.
"The only way I can describe Golden West is as a crown jewel," Wachovia Chief Executive Ken Thompson said on a conference call. "We will do nothing to screw up that model."
Thompson said the purchase would give Charlotte, North Carolina-based Wachovia access to "high-growth, high-wealth" California markets.
It would also advance Thompson's plan to make Wachovia a national bank, closer in size to Citigroup Inc, Bank of America Corp and J.P. Morgan Chase & Co.
Adding Golden West would give Wachovia 3,400 branches, 5,300 automated teller machines, and $669 billion of assets. Wachovia's bank franchise, now largely in eastern and southern states, would reach 55 percent of the US population. About 1,100 jobs and 55 branches will be eliminated. World Savings branches will be rebranded with the Wachovia name.
"The question before the house is why in God's name are we selling, and why are we selling to Wachovia?" said Herbert Sandler, who with his wife Marion is Golden West's co-chief executive. "You can go just so far as a one-product company.... It's time to offer the rest of the product line."
The Sandlers founded Golden West in 1963, and are now in their mid-70s. Their stake in the thrift is worth a couple of billion dollars.
Analysts said the purchase will dilute Wachovia's operating earnings per share by some 2.5 percent in the first year, and increase its exposure to volatile mortgages.