NEW YORK (MarketWatch) -- Wachovia's agreement to buy Golden West Financial earlier this week may spark a new wave of bank mergers as big rivals rush to avoid losing ground in the huge California market, while a difficult interest rate environment continues to highlight the need for economies of scale.
On Monday, Wachovia Corp., after falling short in efforts to bring off a major acquisition last year, agreed to buy California's Golden West Financial Corp. in a $26 billion cash-and-stock deal that would add to its presence in the West and put it deeper into the volatile mortgage business. See full story.
And according to analyst Dick Bove at Punk Ziegel, some other factors too are in play.
He notes the unusual fact that while interest rates remain challenging and mortgage lending and deposit growth slow, the biggest banks' share prices are rising because the Fed is widely expected to pause its interest rate hikes after an expected one today. See full story.
The Wachovia deal highlighted the need big banks have to put together large customer bases that can be served by one banking platform, which allows the banks to lower the cost of providing services per customer. And, Bove added, "Small banks must either sell or face sizable declines in their earnings and earnings growth rates and stock prices."
The Golden West transaction may put the most pressure to do a deal on San Francisco-based Wells Fargo which had been considered for some time to be a potential partner for Wachovia in a deal to create a giant bank on a national scale.
"Wells Fargo can no longer sit still," said Punk Ziegel analyst Dick Bove.
He said that Wells has not done a major deal since 1998, while it has been building its retail franchise in the west, adding new products to attract customers.
"If Wells sits still it will rapidly lose presence as a major competitor in this industry. This bank must get a national presence; it must gain more assets; it must increase its market cap; and it must cross the Mississippi," Bove concluded, and he added, he expects Wells to buy SunTrust.
And analysts at Keefe Bruyette and Woods Wednesday updated their list of potential candidates for takeovers, which has risen to 17 from 10 when the list was last published in November 2005.
my 2 cents:
A company annonounces/finalizes a merger this time of year because they're worried that their stock price might fall when the 6/30 wall street analyst snapshot is taken, so they take advantage of a stong stock price. (Strike while the iron's hot)
Any company that isn't in the news may have the opportunity not to be bought (read: strong enough stock price), but may not be in the strongest position to make an acquisition themselves (read: need to improve stock price).
Look for short term initiatives to gain market share, which will raise the stock price after the 6/30 wall street analyst reports, which will, in turn, give a company strength to make an acquisition. If this doesn't work, then the stock price may move in the other direction and the company will be a more attractive target for acquisition.
Just my 2 cents.
given bbt's less than sterling performance over the last 5 years or so we would be better off if it were for sale.
the premium we would get on any sale would beat what management has done for us lately.
You make such a thing over bought-sold. How ridiculous. An item is bought-sold, or sold-bought. It makes no difference, the product changes hands. If it makes you feel better to keep discussing these two term, then keep at it.
"While not yet half-way through 2006, there have been half as many transactions with sellers' assets of at least $500 million announced so far compared with the total volume for all of 2005. There were only 7 announced transactions by the end of May 2005 compared with 18 so far in 2006. We expect the increased activity level to continue," the analysts wrote in their report.
Washington Mutual is another name drawing attention from both Bove and the Keefe Bruyette team.
It too is a major mortgage lender, based on the West Coast, and likely to see pressure on earnings if there is a protracted slowdown in mortgage lending, or if the widely used option ARM mortgages lead to deterioration in defaults.
Washington Mutual's appeal as a west coast thrift has increased this week since the Wachovia deal.
"Washington Mutual is number 2 in California, creating a scarcity value for any bank besides Bank of America and Wells Fargo with national aspirations," Keefe Bruyette said. "Washington Mutual also has an extensive national franchise, allowing for cost saves in overlap regions with partners."
"We think that Citigroup will finally buy Washington Mutual," Bove said.
Bove handicapped several other deals he thinks might happen:
"J.P. Morgan may be forced to buy this company (Comerica as a defensive move to protect its Midwestern base and get a position on the West Coast. Good Luck on this one."
"HSBC wants a Midwestern presence. It is likely to buy U.S. Bancorp ."
"AmSouth finally completes a deal with either Regions Financial or Fifth Third . Either combination would make sense although we favor seeing the two Alabama banks linking up."
"First Horizon sells to PNC . PNC has extra capital and a desire to grow. First Horizon has operating problems and in our view a need to sell."
"National City and KeyCorp bury the hatchets and do the responsible thing in a memorandum of understanding."
"Mellon Financial and Bank of New York do what they should have done years ago when it was first proposed and merge."