WaMu Seems Ripe For the Picking

The Seattle bank is increasingly touted as a takeout target after its poor fourth quarter.
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The drumbeat is growing louder for

Washington Mutual

(WM) - Get Report

to sell itself.

The Seattle-based thrift's

depressed fourth-quarter earnings results as a result of the housing downturn and its dismal outlook for 2008 is adding fuel to recent market speculation that it could be ripe for a takeover. Media reports last week said that the bank has

held preliminary discussions with

JPMorgan Chase

(JPM) - Get Report


"We do believe the company will be sold, whether or not it is to

JPMorgan I don't know, but I think that deal is still possible," writes Cassandra Toroian, the president and chief investment officer of Bell Rock Capital, in an email. "WaMu is a company of substantial size in the mortgage market that really must survive -- so we operate under the assumption that it too will be sold very soon."

A WaMu spokesman said Friday that the company doesn't comment on rumors or speculation.

An acquisition of the big consumer-centric company, which expanded from an obscure Seattle-based savings and loan into a national retail banking powerhouse with a heavy emphasis in mortgage lending, wouldn't be too surprising. Just last week,

Bank of America

(BAC) - Get Report

agreed to purchase

Countrywide Financial


, the nation's largest independent lender, after its stock fell from approximately $41 a share a year earlier to about $5.

WaMu's shares over the past year have done just as poorly, as the credit crunch and housing decline intensified. The stock, up as much as 10% on Friday, is still down nearly 70% from a year earlier.

For the full year, WaMu recorded a net loss of $67 million, or 12 cents a share, as a result of the charges in the fourth quarter, it said.

The bank attributed its $1.87 billion fourth-quarter loss to a $1.6 billion after-tax charge to writedown goodwill in its Home Loans unit as well as higher provisioning because of the housing market weakness. It set aside $1.5 billion in the fourth quarter for bad loans -- in line with its previously announced estimate on the provision and approximately twice the level of fourth-quarter net charge-offs.

"If you take their guidance for the year and use the high end of the estimates, you come up with a break even year

for 2008. I think a company that basically says that best case is it's going to break even ... That has to fuel speculation that the company might look for a partner in a distressed situation," says Fred Cannon, an analyst at Keefe, Bruyette & Woods.

Market observers say that like BofA, any acquirer of WaMu could also buy it on the cheap and gain a substantial retail deposit and branch network at the same time.

"We continue to see franchise value in WaMu's well-positioned retail banking footprint, and would not that its beaten-down share price has increased attractiveness from a merger math standpoint," writes David Hendler, an analyst at CreditSights. WaMu is currently trading at about 0.61 times tangible book value, according to Hendler.

"We would note that the fair value mark-to-market cushion (when consolidated) provided by a subtangible book value valuation was a key drive in BofA's decision to acquire distressed mortgage lender Countrywide," Hendler wrote.

Paul Miller, an analyst at Friedman, Billings, Ramsey Group, writes that WaMu has roughly 2,300 branches, largely in California, and "is the only remaining way for an acquirer to buy a meaningful presence in that state."

But there are few banks -- at least domestic ones -- that are either big enough or in a position to withstand a purchase of a behemoth company like WaMu. Financial titan


(C) - Get Report

is having its own problems as a result of the credit crunch and mortgage problems. BofA is saddled not only with closing the Countrywide deal, but is also in the process of integrating several recent acquisitions, including LaSalle Bank and wealth management firm U.S. Trust.


Wells Fargo

(WFC) - Get Report

may have the financial wherewithal to buy the company, such a move wouldn't really make sense from a strategic standpoint, since the two banks have a lot of overlap in their footprints, KBW's Cannon says.

On the other hand, Toroian, a contributor to


sister Web site,


, whose Bell Rock Capital does not own shares of WaMu, suggested that a private equity firm may have interest in the bank.

While purchasing the bank outright is unlikely for a number of reasons -- including possible regulatory hurdles -- the notion of a private equity firm taking a stake of some sort isn't all that surprising, given the interest by several distressed buyers recently lurking around the mortgage industry.

In late November, Citadel Investments provided some much-needed liquidity for

E*Trade Financial

(ETFC) - Get Report

, which saw its stock price fall below $5 a share after it struggled to stay afloat from writedowns on asset-backed securities and troubles in its mortgage arm. Citadel ended up paying $1.6 billion for a 20% stake in the New York-based online brokerage.

Still, at least one analyst says the concerns about Washington Mutual's business are overdone.

"We believe that concerns about viability are overwrought," writes Howard Shapiro, an analyst a Fox-Pitt, Kelton, in a note. "Viability should only come into play if capital levels were breached."

"The company's tangible equity to capital ratio is 5.5%," he said in an interview. "They have $3.7 billion of capital above that 5.5% ratio; they have $2.5 billion in current reserves. That's $6.2 billion and

WaMu expects to reserve $8 billion in 2008 -- that's $14.2 billion in reserving plus capital ability. So in order to penetrate that 5% capital ratio you would have to have losses in excess to that. "

But even then, it would still have tangible capital of 3% to 4%, Shapiro added. "It's not ideal but it's not a disaster," he said

WaMu did not specifically address the possibility of a sale during a conference call late Thursday to discuss earnings. Still, Chairman and CEO Kerry Killinger sought to reassure analysts and investors that the company doing everything it could to get back to profitability.

Last month, WaMu slashed its dividend 73% to 15 cents a share, raised $2.9 billion in a convertible offering and cut more than 3,000 jobs and exited the subprime lending business through a restructuring of its home loans unit. Killinger also said he would not accept a cash bonus for 2007 and bonuses for the bank's management team have "have been greatly reduced."

"We all understand that we have to do better and we will," Killinger said.