Wachovia Goes Bicoastal

It keeps pace in the size war with an acquisition of Golden West.
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Updated from 8:31 a.m. EDT

Wachovia's

(WB) - Get Report

national ambitions got a big boost with its $25 billion acquisition of

Golden West Financial

(GDW)

, the nation's second-largest savings and loan.

The cash and stock deal, if completed, will give Wachovia a strong foothold on the West Coast, permitting the bank to transform itself from a large regional lender to a true national bank. The deal also would make Wachovia a major player in the home-lending market.

In a news release, Charlotte, N.C.-based Wachovia said it would get 285 consumer banking offices with $62 billion in retail deposits in 10 states and enter new markets in California, Arizona, Colorado, Illinois, Kansas and Nevada. Golden West is headquartered in Oakland, Calif.

The nation's fourth-largest bank in terms of assets announced the deal late Sunday, following reports that an acquisition was in the works in

The New York Times

and

The Wall Street Journal

.

Terms of the agreement call for each Golden West share to be exchanged for a package of 1.051 shares of Wachovia common stock and $18.65 in cash. Based on Wachovia's closing stock price Friday, this equals $81.07, a 15% premium over Golden West's closing price.

Wachovia expects to close the deal in the fourth quarter of this year and said it would be accretive to EPS two years after that, excluding merger-related and restructuring expenses. The deal should provide an internal rate of return of 17% for shareholders, Wachovia added.

The initial reaction from investor and many analysts was to give a thumbs down to the deal, at least with regards to Wachovia shares. In early trading, the stock was down $3.50, or nearly 6%, to $55.89. Shares of Golden West, not surprisingly, were up sharply, rising $5.51, or 8%, to $76.02.

A number of bank analysts and traders were quick to find fault with the deal, saying Wachovia overpaid for Golden West and may be underestimating the potential fallout from a downturn in the California real estate market.

"This is a company that's heavily leveraged to California mortgages,'' says Timothy Ghriskey, a money manager and chief investment officer of Solaris Asset Management in Bedford Hills, N.Y. "There are no cost savings. (Golden West) is run about as lean as you can get.''

Ghriskey, whose fund doesn't have a position in the stock of either bank, says the deal could be costly for Wachovia down the road, as it has to spend more money to bring Golden West's operations up to Wachovia's standards.

Prudential Equity bank analyst Michael Mayo, in a research note, says the deal is not cheap, especially since he believes "the move dilutes long-term growth rates'' at Wachovia.

Wachovia is paying 2.9 times Golden West's book value.

But not everyone was so negative. CreditSights financial services analyst David Hendler says it's a "good strategic move'' for Wachovia. He notes that Golden West is a well-run bank that has never had any serious credit-quality issues with its big mortgage-loan portfolio.

The deal could have big ramifications for other banks -- most notably

Washington Mutual

(WM) - Get Report

and

Wells Fargo

(WFC) - Get Report

.

Seattle-based WaMu is the nation's largest thrift and often has been the topic of merger speculation. WaMu, one of the nation's top-three mortgage lenders, is particularly attractive because it has branches on both coasts, including a major presence in New York City.

Bank analysts often have speculated that

Citigroup

(C) - Get Report

, which needs to bolster its domestic consumer lending business, might be a possible buyer for WaMu. The

Federal Reserve

also recently gave Citigroup the OK to resume making large acquisitions.

The Wachovia/Golden West transaction also could spur Wells Fargo, which normally eschews big acquisitions, into action. In buying Golden West, Wachovia is making a bold move into Wells Fargo's home base of operation. San Francisco-based Wells Fargo, the nation's fifth-largest bank, has shown little inclination to expand its retail operation east of the Mississippi.

Ghriskey says the deal will likely spark an upward move in the shares of smaller bank stocks. In particular, he'd look to buy shares in small California banks.

The banking industry has undergone swift consolidation in recent years, and Wachovia has been one of the most active dealmakers. But most of those acquisitions have been confined to banks on the East Coast and in the southeastern states.

Last year Wachovia considered making a bid for credit card firm MBNA, which ultimately was bought by

Bank of America

(BAC) - Get Report

.

The acquisition of Golden West is the second big-bank merger announced this year. In March,

Capital One

(COF) - Get Report

said it was buying New York-based

North Fork

(NFB)

bank for $14.6 billion.

The sale of Golden West will bring to an end the long reign of Herb and Marion Sandler, as co-chairmen and co-CEOs of the West Coast thrift. The husband and wife team, both of whom are in their mid-70s, turned Golden West into a dominant player in the home-lending arena. Golden West is a major player in adjustable-rate mortgages.

With the mortgage market slowing down, now would appear to be an opportune time for Golden West to sell itself.

Indeed, Golden West shares have had quite a run. Before the deal was announced, the stock was up 6% this year. But the shares are up 84% since January 2003, when the home-lending market -- ruled by record-low interest rates -- turned red hot.

One thing that has inhibited bank mergers this year is the fact that many smaller-bank stocks are trading at relatively high multiples. Investors have bid up shares of smaller banks on the expectation that many will get acquired.

The higher multiples could keep a lid on deal premiums.

Wachovia shares finished Friday up $1.01 at $59.39. Golden West gained $1.82 to close the session at $70.51.