Indeed, Wells initially said it was winding down most of Wachovia's investment banking division. Top executives indicated that Wells would only hold onto Wachovia's vast network of broker-dealer branches, and operations that would build out its own capacity for plain-vanilla services. Those include products like interest-rate protection, foreign-exchange services and access to capital markets via mutual funds and the like. "With Wachovia we have doubled the customer base where we can apply the Wells Fargo model," CFO Howard Atkins said during a conference call in April. Atkins said that, unlike competitors in the investment and commercial banking spheres, Wells just wanted to earn fees from helping customers -- not operating heavily in the capital markets or overseas. A tight lid would be kept on risk-taking, as Wells wound down Wachovia's more exotic positions. Shortly after the acquisition, CEO John Stumpf had assured investors that activities like commercial banking and investment banking -- functions that are dominated by big players like Goldman Sachs ( GS), Morgan Stanley ( MS) and JPMorgan Chase ( JPM) -- were on the chopping block. Wells was "not interested in businesses that are just there for proprietary trading or other investment activities -- money and money, if you will," Stumpf said at a conference in December. He added that such operations were "not compatible with our organizational structure and in our operating model and vision and values." But since then, a picture has slowly emerged of a firm that drank the profit Kool-Aid and wants another sip. Wells is now hoping to expand its presence in mergers and acquisitions, advisory services, fixed-income trading, research, sales, syndications and underwriting, in addition to the retail brokerage network.
The decision to maintain and expand investment banking capability has already begun to boost revenue. The markets have eased, firms have been issuing hundreds of billions of dollars worth of new stock and bonds, and Pfizer's ( PFE) deal for Wyeth ( WYE) in January was the first signal that M&A market was kicking off again. It was soon followed by a $46 billion deal for Genentech by - Roche, Oracle's ( ORCL) $7.1 billion purchase of Sun Microsystems ( JAVA) and Merck's ( MRK) $41.1 billion deal for Schering-Plough ( SGP). Meanwhile, an opportunity emerged in the financial tumult of the past year. Lehman Brothers is gone, Bear Stearns is wrapped into JPMorgan, Merrill Lynch faces difficulties at Bank of America ( BAC) and Goldman and Morgan Stanley ( MS) face their own individual hurdles. Wells began to reap the benefits of the situation during the first quarter. Wachovia contributed 41% of the firm's combined revenues, over 40% of net interest income and 43% of noninterest income, with strong contributions from trust and investment fees, and trading. Those two activities resulted in $2.2 billion in income, compared with $802 million at legacy Wells. Few question Wells' track record in terms of ample risk-management, its successful integration of Norwest after a complex merger, and its managerial prowess throughout the crisis and beyond. For those reasons, some argue that Wells would be remiss to ignore the opportunity in investment banking. "There's a lot fewer players in that market than there used to be," says Joe Keetle, a senior wealth manager at Dawson Wealth Management, a financial-services firm in Cleveland. "It doesn't surprise me that Wells would try to expand into that type of business because ... it has a very strong brokerage division with the acquisition. And with things going forward -- IPOs and such -- they're going to want some exposure in that area as well."
However, the bank is now entering a sphere where it lacks a track record. And while investment banking stands to boost revenue dramatically, it also creates earnings volatility at a company that prides itself on prudence and consistency. Atkins has made a point of noting that Wells has outperformed peers because it grew traditional loans and deposits, while avoiding all the fancy proprietary trading activities and exotic securities that brought others down. Atkins' comments beg the question: How will Wells' foray into investment banking play out in practice? For instance, Wells is still averse to the notion of proprietary trading -- or trading to earn profits for the firm itself, rather than for customers who pay fees for such trading expertise. That has been a profitable, if risky, business for big Wall Street banks in good times. And Wells rankled Wachovia brokers last year by limiting retention bonuses, which could limit the company's ability to attract top talent. It's unclear whether Wells will be able to maintain its culture of cautiousness and decorum in a world where booming profits get backslaps and every additional zero at the end of a bonus payment is another notch on the belt. "I think they're jumping the gun on trying to hold onto too much over there," says Lee Munson, chief investment officer of Portfolio Asset Management. "I think they're getting too bloated and taking on too much." Instead, says Munson, Wells should stick to what it does best: traditional lending. Indeed, while there seemed to be ample opportunity in the investment banking space, Wells-Wachovia's ranks have slipped markedly in league tables this year. The combined firm would have ranked 16 among the top 20 financial advisors in terms of deal value in 2006, 2007 and 2008, according to Mergermarket.
So far this year, Wells-Wachovia has slipped to 35, performing eight deals worth $920 million through June 26. That compares with 42 deals worth $71.3 billion for all of last year. Top firms like Goldman, JPMorgan, BofA-Merrill, Citigroup and Deutsche Bank ( DB) have also seen a decline, but not nearly as sharp. "Wells is out of their league on this one," says Munson. "I think they're trying to be a Bank of America, and that's a mistake. There's only room for one Bank of America and one JPMorgan and one Goldman Sachs." Whether Wells will be able to find its niche in the investment banking space is yet to be seen. It will take a good deal of time to solidify a reputation for the brand that is to be unveiled in coming days. Juneja, the JPMorgan analyst, noted that since Wells is moving forward with its Wells-like limitations, "it will have to be a market maker in the products it focuses on." Tried and true believers have faith that the firm will succeed. Richard Bove, an analyst at Rochdale Securities, calls the integration "a sizable challenge," but says the Wachovia acquisition was "the right move," largely because of its capital markets business and gigantic sales force. "Wells management has a long track record of delivering on its promises ... Plus, betting on Wells abilities has always made sense and it makes sense now," Bove wrote in a report earlier this year.