ZachStocks

Wells Fargo & Company (WFC) made headlines this morning when they announced the purchase of Wachovia Corporation (WB). Wachovia had already entered an agreement to sell its banking operations to Citigroup Inc. (C) which was leaning on assistance from the FDIC. The new deal encompasses not only the banking portion of Wachovia, but the full company including the investment bank and brokerage operations.The deal is a stock based transaction with each share of Wachovia being exchanged for 0.1991 shares of Wells Fargo. Based on closing prices from Thursday trading, the deal is valued at roughly $15.1 Billion dollars. Management states that the deal to buy the entire firm avoids the complexity and inevitable loss of value that would have occurred if the company had been split as planned in the Citigroup deal.

Wells Fargo is taking on the full balance sheet of Wachovia including the mortgage securities that have caused so much havoc. In order to finance these liabilities and still keep their solid financial footing, Wells Fargo is expected to issue $20 billion in securities (mostly common stock) which would most likely be priced next week. This is similar to the JP Morgan deal that was priced last week. If the WFC offering performs even remotely similar to the JPM deal, investors could be looking at a very attractive trading opportunity.

Potential purchasers of the new company will be looking at a very strong financial services firm. Wells Fargo has a broad presence in the western United States, and will now be able to leverage Wachovia’s east coast footprint. Some mergers struggle with cultural differences, but Wachovia and Wells Fargo have many similarities that should make integration much easier. Both firms have opted to focus on consumers rather than spending too much energy on lower margin institutional clients, and both have their roots in smaller regional bank culture which caters to their strategy well.

During the financial crisis, Wells Fargo stock has performed exceptionally well. The stock is just a bit off its 52 week high and while earnings are contracting a bit this year, they are still positive and supporting the 3.6% dividend yield. While the stock may sell off a bit once the news is digested and the timing is set for the stock offering, the weakness will likely give investors a good low-risk buying opportunity and I would recommend considering a purchase over the next week.

FD: Author does not have a position in WFC

Additional Reading:

Trader Mark: Wells Fargo Swoops in to Steal Wachovia

New York Times with a Synopsis of the deal