This article first appeared in the St. Louis Beacon: There's more than a little irony that Wachovia Corp. announced its bid for A.G. Edwards around Memorial Day last year.
The acquisition marked the passing of another St. Louis headquarters and signaled the inevitable loss of jobs when two companies mate in the name of synergy.
It is also a testament to the money lost by those A.G. Edwards shareholders who accepted the cash-and-stock offer from Wachovia. The banking giant promised a stronger financial future, long-term stock growth and a solid dividend.
Since the deal closed on Oct. 1, however, these shareholders -- if they still own Wachovia stock -- have seen their investment deteriorate. Last month, their Wachovia stock dividend was cut by 41 percent.
Shareholders have been slammed by the rapid decline of the U.S. housing market and big losses tied to mortgages. The financial research firm Morningstar says Wachovia holds nearly $13 billion in "at risk securities." This collection of loans made to companies which already have high amounts of debt, complex securities backed by pools of bonds and securities backed by mortgages could prove troublesome if the overall economy, bond market and housing market worsen.
And in late April, the Treasury Department said Wachovia would pay up to $144 million in claims and penalties to settle charges that consumers were victimized by telemarketers. The government said Wachovia engaged in "unsafe or unsound practices" in its relationship with telemarketers. Wachovia didn't admit or deny wrongdoing.
"It almost becomes a case of 'What will happen next?' " says Juli Niemann, executive vice president of Smith, Moore & Co., a financial advisory firm based in Clayton.
Niemann was interviewed a few days before Wachovia revised its first-quarter loss to $708 million, or 36 cents a share, on May 6. Three weeks earlier, it said it lost $393 million, or 20 cents a share, for the January-March period.
WHEN WILL WACHOVIA RECOVER?
Wall Street isn't sure when Wachovia's stock might return to pre-deal levels or reach post-deal expectations. Usually, takeovers as big as the $6.9 billion A.G. Edwards deal get a lot of Wall Street attention well after they have been completed. But during a mid-April telephone conference call by Wachovia executives with Wall Street analysts, no one asked about A.G. Edwards.
Wachovia officials didn't say much either -- except to note that the integration was going "smoothly" -- probably because they were peppered with questions about the housing crisis, the dividend cut, the need to raise more money, horrible first-quarter results and financial forecasts.
"There are so many problems with Wachovia that minor problems that might occur with A.G. Edwards are on the back burner," says Jaime Peters, who follows the Charlotte, N.C. banking giant for Morningstar.
She liked the takeover, calling it "a bright spot in an otherwise cloudy company forecast." Despite Wachovia's problems, "I don't think they will underinvest in Edwards," Peters adds.
Niemann didn't like the deal, saying that A.G. Edwards "had the size, they had the capacity and they had the systems to remain independent." She wonders if Wachovia's woes will impair efforts to integrate A.G. Edwards. "Will they take their eye off the ball?" she asks. "Can they devote everything they need to make this work?"
Wachovia had promised that combining A.G. Edwards and its own brokerage business would be a "low-risk transaction." Both firms use the same technology, and they have "complementary customer and broker-friendly sales and service models," Wachovia said.
Wachovia pointed out that it has made six brokerage acquisitions and mergers since 1998, although analysts note that the A.G. Edwards deal involved far more people and far more dollars than any of the previous purchases. Even under the best circumstances, Wachovia said it would take until early 2009 to integrate A.G. Edwards fully. "Re-branding" under the Wachovia umbrella is starting this year.
WAS THE PRICE RIGHT?
The combination created the second largest U.S. brokerage in terms of net revenue and the third largest in total client assets. Still, when the transaction was announced May 31, 2007, even analysts who liked the deal said Wachovia overpaid at a time when the economy and the housing market were declining.
Wachovia was still digesting the October 2006 acquisition of Golden West Financial Corp., a giant mortgage-lender and savings and loan institution. Wachovia paid about $24 billion, and it paid even more as Golden West became the biggest financial drain.
"The timing could not have been worse," says Peters. "Golden West has been bad news for current shareholders."
G. Kennedy Thompson, chairman and CEO of Wachovia, conceded to angry shareholders at the April 22 annual meeting that the Golden West purchase was "ill-timed." As for Wachovia's challenges, he said: "I'm not here to sugarcoat things."
Wachovia's bid for A.G. Edwards included $35.80 in cash and 0.9844 Wachovia shares for each share of A.G. Edwards stock. Based on Wachovia's closing price of $54.55 on May 30, the deal was worth $89.50 a share.
A.G. Edwards stock closed at $77.15 on May 30, then jumped to $88.16 the next day. On the firm's final trading day, the stock closed at $83.75. Shareholders would have done well if they simply sold their shares. If they took the deal, they were hit hard.
As the mortgage-crisis worsened, Wachovia's stock fell, slipping briefly below $24 a share. At this nadir, the value of each former A.G. Edwards share -- the cash plus Wachovia stock -- was about $60.
Wachovia's stock was recently trading in the high $20s to low $30. (It closed at $30.08 on May 6.) But that's not even close to mollifying former A.G. Edwards investors. Their quarterly Wachovia stock dividend is down to 37.5 cents from 64 cents per share. The last A.G. Edwards dividend was 20 cents a share.
Wachovia's stock has inched up, thanks to Wall Street's belief that cutting the dividend was smart because it will save $2.1 billion. Last month, Wachovia also raised some $8.1 billion by issuing common stock and preferred stock.
As recently as late February, Wachovia had proclaimed the dividend was secure and that the company had a sufficient financial cushion to weather the unfolding subprime crisis. On April 14, Thompson justified cutting the dividend as a "right-sizing" of its payout to shareholders. This action "was not taken lightly," he told analysts. "It was the right decision given the (economic) outlook."
THE SILVER LINING AND THE CLOUD
Analysts praised the cost-cutting and money-raising tactics; and two have since raised their ratings to buy from hold. But there are some boos among the cheers.
"Why should investors rally around a board (of directors) that has just cut their dividend so it could make a 'sweetheart deal' with a small number of investors who got to buy the stock at a 15 percent discount and a preferred (stock) with a 7.5 percent (dividend) yield?" said an April 15 report by the New York investment firm Punk, Zeigel & Co.
"The shareholders who had their dividends cut never got an opportunity to share in the bonanza," said the firm, which has a "market perform" rating for Wachovia.
Most analysts are neutral, according to the financial data firm Thomson First Call. Five have buy ratings, 12 have hold ratings and four recommend selling the stock.
Wall Street cynics say investment bankers often use the term "hold" or "neutral" when they really mean "sell" or "avoid." These critics also chide investment banking firms for being too optimistic in the face of financial warning signs.
"If they liked the stock at $60, they love it at $30," goes a version of the critics' chant for what they consider unwarranted analyst optimism. For A.G. Edwards' shareholders who accepted analysts' advice that their Wachovia stock would be in the $60s one year after the merger, there isn't much love right now.
Robert W. Steyer is a freelance journalist in New York and former Post-Dispatch reporter.