Wachovia’s $6.8 billion acquisition of A.G. Edwards establishes a new paradigm for retail brokerage, one that encompasses scale, fee-based advice and advisor choice.
Wachovia Securities' takeover of 120-year-old A.G. Edwards is a big deal — a surprising deal, even. But not just because — with 14,784 FAs and $1.147 trillion in client assets — it creates the third-largest brokerage after Merrill Lynch and Smith Barney. It's also a landmark deal if only to answer the question: Can a beloved regional firm be swallowed whole by a wirehouse (sorry, Wachovia, with your size, you're wirehouse like) and successfully (and happily) retain the regional reps? After all, reps at regional brokerages, such as A.G. Edwards, tend to be zealous about their firms, employees who are damn glad not to be working for one of those big-city, Wall Street firms, thank you very much. Or so goes the stereotype.
Yes, it will be fun to watch. But what may be even more interesting to observe is how Wachovia's hybrid business model fares. By hybrid model, we mean Wachovia financial advisors can pick how they would like to affiliate, as independent-contractor reps (through Wachovia Securities Financial Network or FiNet) or as traditional employees. Wachovia says such a model is a competitive edge because it offers advisors choice. While there may be restrictions or a blackout period for A.G. Edwards reps during the integration process, Wachovia is the only one of the five wirehouses (again, apologies to Wachovia CEO Danny Ludeman) that offers an independent platform.
Some say the now top-tier Wachovia with its hybrid model will make for a formidable opponent to Smith Barney and Merrill Lynch; some industry consultants even argue that Wachovia may now represent a new industry paradigm, considering its added heft. Will rival reps be drawn to this model: a true national banking/securities brand with the freedom of an LPL? “The deal represents an evolution toward a broader range of how advisors choose to work,” says Stephen Winks, publisher of Senior Consultant, a newsletter aimed at helping advisors transition from a commission brokerage to a fee-based business model. With its indie/employee arrangement, says Winks, Wachovia is the only big firm that has figured out that, “It's all about advisor choice,” he says. Other firms have been “reticent to change.”
Chip Roame, managing principal of Tiburon Strategic Advisors, says, “Wachovia Securities is the leader in defining the new playing field, whereby financial advisors can choose which way they want to work with their firms. Wachovia will be a leader for the next decade.”
It's not a layup, though. When Ameriprise (then American Express Financial Advisors) created parallel distribution platforms a few years ago — captive and independent — the firm saw most of its experienced, captive advisors choose independence. This created profit pressures for the company and wasn't uniformly good for the newly independent advisors, some of whom needed the structure and support that employee status confers to successfully build their businesses.
If Wachovia, itself a Frankenstein of acquisitions, can successfully oversee the migration among its different channels, a process it has already begun to navigate, the firm could become a major magnet for reps. And that could force other wirehouses to follow suit and develop independent platforms of their own, according to industry consultant Andre Cappon, president of The CBM Group in New York. “If Wachovia manages the transition properly, it could work,” he says.
In July 2006, Wachovia loosened its rules governing who is eligible to go independent in an attempt to keep reps from decamping to other b/ds. Today, reps who have generated $250,000 or more in revenue in the trailing 12 months and have five years on the job at Wachovia can qualify for a transfer to the independent platform. It's unclear what kind of flexibility incoming A.G. Edwards reps will have, but Wachovia says that eventually the independent platform will be available to those A.G. Edwards reps who qualify.
The implications of the acquisition stretch well beyond the corridors of Wachovia and A.G. Edwards. If the marriage works, it could be open season on the regionals, if it isn't already. Many have been gobbled up (and in one case, spit back out) by the industry's big firms in recent years. (See chart on pg. 46 for the biggest deals in the last 10 years).
The deal-making will take off as the larger regional players realize that they simply can't keep pace with the wirehouses' breadth of products and services. “A.G Edwards is selling because its future is bleak,” says Dick Bove, an analyst at Punk Ziegel. “The regionals have fallen way behind in fee-based advice.” So, many of them will seek partners either by selling to the highest bidder, a la A.G. Edwards, or merging with a peer. There is one problem, however, says Sanford Bernstein analyst Brad Hintz, who agrees that the “regional b/ds are attractive takeover targets.” And that is, “The issue you have now with the regionals is that there aren't a lot of girls left to ask to the prom.” Among the list of major regionals — essentially, a term used to describe firms that may have a national presence but are not based in Manhattan — left on the market are Raymond James, Edward Jones, RBC Dain Rauscher, Jefferies Group and Stifel Financial.
Which of those will be picked off next is anyone's guess. But Roame ventures, “The one prime property that is left is Raymond James, both because it has roughly 1,000 captive reps in the growing Southeastern U.S. and because it has 4,000 reps in the fast-growing independent rep channel.” But unless and until Wachovia is successful with its hybrid model, the wirehouses may not make a play for an independent like Raymond James, Roame says. In any case, almost immediately following the Wachovia announcement, Tom James, CEO of Raymond James, issued a statement saying the firm is “committed to independence.” (Then again, A.G. Edwards CEO Robert Bagby said the same thing.)
Not everyone is awed by the transaction. “Wachovia paid too much at the top of the cycle for a firm that has [lower-producing] reps,” says Punk Ziegel's Bove. “I don't think they should have bought it. The whole thing is unnecessary.” Bove adds bluntly, “Wachovia has not figured out yet that it better start putting its cash in its pocket and building its business internally. Its constant need to make acquisitions is just killing the stock.” Wachovia's stock price has lagged its banking peers in the last three years, rising 8.8 percent versus the sector average of 10.6 percent, according to Morningstar.
Kevin Fitzsimmons, managing director at Sandler O'Neill, says the purchase, at 21 times A.G. Edwards' earnings and 1.85 percent times its client assets, “seems a little high to us.” However he's also quick to point out that A.G. Edwards does have some “scarcity value given the dwindling list of large independent retail brokerage franchises.”
Whether it's a deal for Wachovia or not, A.G Edwards seized an excellent opportunity to sell high. Robert Ellis, senior analyst at Celent, a Boston-based financial research and consulting firm, says, “A strong bull market always pushes the value of brokerage firms up. AG Edwards recognized this, and with the 16 percent premium, is definitely selling out for top dollar.”
Obviously, the question of whether Wachovia paid too much will be partly determined by how many A.G. Edwards reps stay. Wachovia executives said on the conference call that the firm expects only 3 percent “regrettable attrition” (by regrettable, the executives mean they won't mourn the departure of many of the lowest producers). When you add the $1.25 billion in retention packages ($188,000 per advisor) for advisors and $860 million in restructuring charges, the cost of the deal is closer to $9 billion.
Not surprisingly, recruiters — who tend to predict the failure of mergers because it's good for business — argue that meshing the two cultures will prove far trickier than Wachovia management estimated. “It seems like a take-under rather than a takeover,” says recruiter Steve Rosen, president of Rainmaker Associates in New York. “It's going to be a failure like the rest of them — Merrill/Advest, Citi/Legg. They're going to lose a lot of brokers.” (SmithBarney says it retained 80 percent of Legg Mason reps.)
Reps have a wide range of viewpoints. Some contacted by this magazine expressed excitement over the deal; some were bitter. Either way, it's going to be a challenge for Wachovia, since A.G. Edwards reps are happy bunch right where they are. The firm is always among the top two in Registered Rep.'s annual Broker Report Cards survey, and its employees consistently vote it the firm with one of the best corporate cultures in the business as demonstrated by its perennial appearance in Fortune's “Top 100 Companies to Work For.”
Wachovia Securities CEO Ludeman, of course, sees a great match. The firm has, he says, done six acquisitions. “You find very few firms that share the same philosophy about representing both major markets as well as local markets. We want to preserve that regional firm culture, a sort of heartland of America. That's one of the things that will make this merger successful.”
Top 10 retail brokerage deals in the last decade ranked by price.
|Buyer/Target||Date Announced||Deal Value ($M)||Price/LTM Earnings||Deal value/Revenue(x)|
|Wachovia Corp./A.G. Edwards||5/30/2007||6,936.3||20.60||2.23|
|Alliance Capital Mgmt. Holding/Sanford C. Berstein||6/20/2000||3,545.1||N/A||N/A|
|Ameritrade Holding Corp./TD Waterhouse Group||6/22/2005||2,734.5||15.15||N/A|
|Fleet Financial Group/Quick & Reilly Group.||9/16/1997||1,598.2||18.67||2.82|
|Investor Group/Linsco/Private Ledger||10/27/2005||1,500.0||N/A||N/A|
|Royal Bank of Canada/Dain Rauscher||9/28/2000||1,458.9||15.25||1.24|
|Thomas H. Lee Partners LP/Refco Group||6/08/2004||1,282.5||N/A||N/A|
|Nomura Holdings/Instinet Holding||11/02/06||1,200.0||N/A||N/A|
|First Union Corp./EVEREN Capital||4/25/1999||1,171.5||15.50||1.40|
|Wachovia Corp./Prudential Securities||2/19/2003||1,100.0||29.10||0.84|
|Source: SNL Financial 6/2007|
Wachovia is now a top-three retail brokerage with a 14 percent market share after acquiring A.G Edwards in a $6.9 billion cash and stock deal. (The deal is set to close n the fourth quarter.)
|Category||Wachovia Securities||A.G. Edwards||Combined||Merrill Lynch|
|Pre-Tax Income (MM)||$1,405||$521||$1,926||$2,913|
|Revenue per FA||$688,000||$522,000||$666,000||$790,000|
|Assets per FA||$80 million||$57 million||$72 million||$103 million|
|Client Assets||$773 billion||$374 billion||$1.147 trillion||$1.6 trillion|
|Headquarters||Charlotte, NC||St. Louis, MO||St. Louis, MO||New York|
|Source: Wachovia Securities and Merrill Lynch |
*Revenue, pre-tax income and pre-tax margin reflect trailing 12 months ending 3/31/07.
Merill 2Q and 3Q reflect prevous segment reporting; 4Q and 1Q 01 reflect new segment reporting.
**Represents assets in annuitized revenue products.
CHOOSE YOUR WEAPON
The various ways financial advisors can affiliate with Wachovia.
|Unit||Description||# of Advisors|
|Private Client Group |
— Profit Formula
|Traditional brokerage |
|Investment Services Group||In-bank brokerage||1,356|
|Independent Brokerage Group |
— Wachovia Securities Financial Network
— Latin America Group
|Independent contractor |
|Source: Wachovia Securities|