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Wachovia Deal Stokes Brokers

Mark DeCambre

Updated from 6:33 a.m.

Wachovia's (WB Quote) $6.8 billion buy of A.G. Edwards (AGE Quote) set off a huge rally in the regional brokerage sector Thursday as Wall Street wagered on which will be the next to be taken out.

Wachovia's cash-and-stock deal will create the second-biggest U.S. brokerage firm after Merrill Lynch (MER Quote). The plan, which gives shareholders of St. Louis-based A.G. Edwards a 16% premium to Wednesday's closing prices, set off a fierce rally in Raymond James (RJF Quote) and solid gains in other players such as Jeffries (JEF Quote) and Piper Jaffray (PJC Quote).

The CEO of one regional broker, who declined to talk on the record, expects consolidation to continue in the industry among regional brokerages and bigger financial institutions.

"It makes financial sense. There's going to be a natural consolidation in the financial services business," the CEO says, noting that teaming up with a bigger partner allows more efficiencies tied to expenses such as training staffers, technology and brand building. "In the end, there will be four or five firms. You don't need 30 choices," he adds.

In midday trading Thursday, Raymond James was up 9% while Piper and Jeffries were both up 4% to 5%.

Charlotte, N.C.-based Wachovia will combine Edwards with its brokerage operation, creating an outfit with 15,000 brokers and $1.1 trillion in client assets.

Wachovia said Daniel Ludeman, CEO of Wachovia Securities, will lead the combined brokerage firm, with A.G. Edwards chief Robert Bagby becoming chairman of the brokerage operation. Prudential (PRU Quote), which owns 38% of Wachovia Securities, called the deal "highly attractive" and expressed "complete confidence" it will work.

"The long-term growth opportunities of the brokerage industry are extremely compelling to Wachovia, and we have long expressed our interest in growing this business both organically and through acquisition," said Wachovia chief Ken Thompson. "This combination with A.G. Edwards, which is widely considered one of the most highly regarded remaining independent brokerage firms in the industry, will further enhance our scale and relevance."

The combined firm will operate as Wachovia Securities. The merger is expected to be completed in the fourth quarter of 2007, and integration is expected to be completed by the end of the first quarter of 2009.

The combined organization is expected to benefit from significant annual expense efficiencies, estimated at $395 million after tax by 2009. These efficiencies represent 10% of the combined firm's most recent fiscal year-end expense base. Wachovia is expected to record merger-related and restructuring charges and exit cost purchase accounting adjustments of approximately $860 million after tax in connection with the transaction over the 18-month integration period.

A.G. Edwards rose $10.53 to $87.69, and Wachovia slipped 32 cents to $54.23.