SAN FRANSISCO – Wachovia Corp. (WB), the nation's fourth largest bank, is muscling into the West with a $25.5 billion deal to buy Golden West Financial Corp. (GWB), a mom-and-pop shop that blossomed into a prized savings and loan.
The stock-and-cash acquisition initially valued Golden West at $81.07 per share — 15 percent above the company's last price on the New York Stock Exchange before the takeover was announced late Sunday.
The proposed sale price dropped by more than $1 billion Monday as Wachovia's stock declined amid investor concerns about how the deal will affect its future earnings. Wachovia shares fell $3.71, or 6.3 percent, to $55.68 in afternoon trading on the New York Stock Exchange, where Golden West shares rose $4.82, or 7 percent, to $75.33.
With the takeover, Charlotte, N.C.-based Wachovia would pick up a 285-branch network spanning 10 states that would fill a void in the company's operations. Golden West earned $1.5 billion last year, primarily from making the adjustable rate mortgage loans that have been its bread and butter for decades.
Oakland, Calif.-based Golden West operates its branches as World Savings Bank — a brand that began to take shape 43 years ago when the husband-and-wife team of Herbert and Marion Sandler paid $4 million for a San Francisco Bay area savings and loan with just $34 million in assets and 25 employees.
Boasting $125 billion in assets and 11,600 employees today, Golden West now ranks as the nation's second largest savings and loan behind Washington Mutual Co. The Sandlers, now in their mid-70s, have remained Golden West's co-chief executive officers in one of corporate America's most unique partnerships.
In a report issued Monday, CreditSights analyst David Hendler said the deal raises questions about whether a large bank like Wachovia will be able to retain the same personal touch that made Golden West such a success under the Sandlers.
Although they refused to sign an employment agreement with Wachovia, the Sandlers have promised to remain on board as long as Wachovia Chairman Ken Thompson desires.
Even as it has steadily grown with a series of acquisitions, Wachovia's 3,159 offices have been limited to 16 states concentrated in the East and South. The company acquired a small presence in California earlier this year with a $3.9 billion acquisition of auto lender Westcorp, which has 19 branches in southern California.
Buying Golden West will enable Wachovia to substantially expand its presence in California, where World Savings has 123 branches and $32 billion in deposits. The deal also will give Wachovia its first branches in Arizona, Colorado, Illinois, Kansas and Nevada. Wachovia doesn't plan to begin converting the World Savings branches to its name until late 2007.
If the deal goes through as expected late this year, Wachovia will control about $669 billion in assets and deposits of $390 billion.
The combined deposits will give Wachovia a national market share of 6.6 percent, ranking third behind JP Morgan Chase & Co. at 7.3 percent and Bank of America Corp. at 11 percent, according to Prudential Equity Group analyst Michael Mayo.
Wachovia would remain fourth in asset size, trailing Citigroup Inc. (C) ($1.6 trillion), Bank of America (BAC) ($1.4 trillion) and JP Morgan Chase (JPM) ($1.3 trillion).
Unlike many banking takeovers, there is little overlap between Wachovia and Golden West. Wachovia expects to close 55 branches and lay off 1,100 employees, leaving a combined payroll of 110,000 workers. The cost-cutting is expected to reduce the combined company's expenses by $53 million annually.
Wachovia is counting on the Golden West takeover to boost its pretax earnings by $230 million annually by 2009.
"We feel like we are merging with a crown jewel," Thompson said during an interview Monday. "This is a transformative deal for us."
The proposed sale resolves the question of what will happen to Golden West after the Sandlers retire — a question that had been dogging the company for several years. Herbert is 74 and Marion is 75.
But Herb Sandler told analysts that the sale wasn't driven by succession concerns, stressing that he and his wife were prepared to entrust the company to longtime chief financial officer, Russell Kettell.
Despite Golden West's track record for double-digit earnings growth, Herb Sandler said he and Marion knew the company needed to diversify beyond home mortgages to remain successful in the future.
"You can go just so far with a one-product company," he said during the conference call. He emphasized the sale shouldn't be interpreted as sign that Golden West is worried about a real estate meltdown saddling the company with huge losses, labeling those theories as "a bunch of garbage."
The Sandlers are in line for a $2.6 billion windfall, based on their 10.24 percent stake in Golden West, according to documents filed with the Securities and Exchange Commission. In an interview, Herb said the couple plans to give all their money away through a foundation that that they set up years ago.
The Sandlers and Marion's brother, board member Bernard Osher, have agreed to vote their shares in favor of the sale, Wachovia said. Osher owns a 3.7 percent stake in Golden West.
The deal calls for Golden West shareholders to receive a cash payment of $18.65 per share and 1.051 shares of Wachovia stock for each of their shares.
If the marriage isn't consummated, a $995 million breakup fee could be imposed.
A consumer rights coalition troubled by Wachovia's lending practices already plans to ask federal regulators to block the Golden West takeover.
The Inner City Press/Community on the Move and the Fair Finance Watch asserts Wachovia unfairly imposes higher rates on home loans to African-Americans than non-Hispanic whites and finances pawn shops and payday lenders known for charging high rates for short-term loans to low-income households.
Big bank mergers commonly face objections from consumer groups, but the challenges rarely derail the deals.