Wachovia just launched itself into the big leagues. In a blockbuster deal this morning, Wachovia Corp. announced that it will acquire A.G. Edwards for roughly $6.8 billion in cash and stock to create a firm with $1.1 trillion in client assets under management and nearly 15,000 financial advisors. That puts Wachovia among the top three competitors in retail brokerage--in terms of both assets and advisors--and retail banking.
By comparison, Merrill Lynch has $1.6 trillion in assets under management, and 15,930 financial advisors, while Smith Barney has $1.28 trillion and 13,009 financial advisors.
Under the terms of the deal, Wachovia will swap 0.9844 shares of Wachovia common stock and $35.80 in cash for each A.G. Edwards share. The deal represents a 16 percent premium, or $89.50 per A.G. Edwards share, to A.G. Edwards' closing share price on Wednesday. News of the deal was music to shareholders’ ears. Indeed, shares of A.G Edwards skyrocketed $11, or 14.26 percent, in the first hour of trading on the New York Stock Exchange. Wachovia shares were up 16 cents, or 0.29 percent.
"The deal is pretty powerful," says Wachovia spokesman Tony Mattera. "It combines Wachovia's industry leading scale with a client focus culture that advisors find attractive." He adds that the cultures of the two firms are very similar: Wachovia Securities is a product of several mergers of smaller companies so "it doesn't feel like a wirehouse to a financial advisor." The company is in the process of evaluating both compensation packages and Ludeman will be traveling around the country to meet with A.G Edwards reps, Mattera adds.
Analysts applauded the deal noting that upon completion of the merger, Wachovia will have catapulted itself into a new club. “With this deal, Wachovia Securities solidly places itself amongst the bulge bracket brokerage firms in the U.S.,” says Alois Pirker, a senior analyst at financial services consultancy Aite Group, in an email to Registered Rep. “They have used this unique opportunity to catch up to Merrill Lynch and Smith Barney, leaving other firms like UBS and Morgan Stanley behind them.”
Another analyst says that A.G. Edwards fetched a handsome sum for its operations. "A strong bull market always pushes the value of brokerage firms up," says Robert Ellis, senior analyst at Celent, a Boston-based financial research and consulting firm. "AG Edwards recognized this, and with the 16 percent premium, is definitely selling out for top dollar."
Wachovia will not be without challenges in swallowing its new purchase. For one thing, A.G. Edwards reps are a happy lot, consistently placing second in Registered Rep.’s Annual Broker Report Card, a gauge of advisor satisfaction. It’s also perenially among the top 100 companies to work for according to Fortune magazine's annual rankings. As much as Wachovia says the two firms are “similar companies,” reps who are used to the intimate close-knit culture of A.G. Edwards may bristle at the thought of working for a big corporate bank. So Wachovia may have to work hard to make sure A.G. Edwards advisors don’t jump ship.
In fact, headhunters are already circling like sharks. One A.G Edwards branch office manager says one of his top brokers received five phone calls from recruiters this morning. “It’s really sketchy right now. We’ll have to wait and see,” he says.
On the other hand, the BOM is also hopeful about what the deal could mean for him. “I think long-term it will be a positive. It gives us capital to move forward,” he says. “Smaller firms won’t be able to make it because they don’t have the capital and the product offerings to compete.” He also takes comfort in the fact that Wachovia Securities President and Chief Executive Daniel Ludeman is a former broker having toiled in the trenches before assuming a management role.
Pirker was, in fact, quite optimstic about Wachovia's attrition risk. "I don’t think that Wachovia will relive a similar situation that Merrill Lynch went through with their Advest acquisition, where brokers left the merged unit in herds. Wachovia has a lot to offer for AG Edwards brokers. On one side that is the depth of product and services that Wachovia brings to the table and on the other side is the flexibility Wachovia provides top producers for going independent. Wachovia Securities Financial Network [the independent arm] could be a great opportunity for top producing brokers to go independent instead of leaving the firm. In any case as with every acquisition, there will be a certain level of attrition. Some will be forced by Wachovia (cost savings and reducing overlap) and others will be due to disgruntled brokers, but if Wachovia does it right, it should stay on a moderate level."
Pirker does see other challenges ahead, however. One critical factor in the merger’s success will be Wachovia’s ability to increase cross-selling opportunities between the banking and brokerage sides, he says. Wachovia also lags behind other firms in its transition from brokerage to wealth management. “Merrill Lynch is still a few steps ahead in this aspect,” Pirker says. But ultimately, if it can overcome these obstacles, Wachovia will be well positioned to take market share from other firms, Pirker says. “Size is not everything, but assuming Wachovia will be able to master [those challenges,] the firm has the potential to become the benchmark for a new breed of retail brokerage/banking firms.”
Adam Honoré, another senior analyst at the Aite Group, says he thinks the deal represents a greater threat to smaller regional players than to the big Wall Street wirehouses. “This deal provides Wachovia with deep market penetration in smaller communities. Over 20 percent of U.S. households are in population centers with under 50,000 people – areas in which Merrill Lynch and other firms lack presence. In some ways, smaller regionals may have more to fear in this deal than major competitors. Wachovia can provide the tools and compliance structure to their brokers that make it hard for the regional players to keep up. This deal could trigger acquisitions among some of the larger regional players.”
Wachovia anticipates merger-related and restructuring charges and exit cost purchase accounting adjustments of about $860 million after taxes. The company said it expected the transaction to add to earnings and provide an internal rate of return of 24 percent, far outpacing its cost of capital. The merger is scheduled to close by the end of the first quarter of 2007, pending standard regulatory and A.G. Edwards’ shareholder approval.
The new brokerage outfit will be headquartered in St. Louis and operate under the Wachovia Securities moniker. In terms of leadership, Ludeman will remain in his chief executive role atop the combined brokerage firm. A.G. Edwards Chairman and CEO Robert Bagby will serve as chairman under Ludeman.
