CHARLOTTE, N.C (AP) – A little more than a year after acquiring one of the nation's top mortgage lenders, Wachovia said Thursday it would buy A.G. Edwards for $6.8 billion in a deal that will create the nation's second-largest retail brokerage.
It's the latest in a spree of buying by Wachovia and retail banking rival Bank of America as they seek to expand their financial service businesses and add customers for a broad range of products, from traditional deposit accounts to home and auto loans to wealth management.
“It's not surprising that the industry is ripe for this consolidation,” said Michael Poulos, managing director and head of North American retail and business banking at consulting firm Oliver Wyman. “This essentially gives Wachovia more access.”
Charlotte-based Wachovia Corp. was already a major player in the retail brokerage business, having combined its securities unit with that of Prudential Financial in 2003. But Thursday's deal further solidifies the nation's fourth-largest bank as a top player in a competitive market, as regional securities dealers find themselves under pressure from larger rivals who can poach talent and better cope with falling commissions.
The combined brokerage unit will operate as Wachovia Securities, headquartered in St. Louis, and will have more than 3,300 brokerage locations nationwide, more than $1.1 trillion in client assets and nearly 15,000 financial advisers.
Other A.G. Edwards businesses, including research, underwriting, investment banking, mutual funds and trust, will be consolidated into Wachovia's existing businesses.
The deal further underscores how valuable Wachovia and Charlotte's Bank of America Corp., the nation's leading retail banks, place on attracting customers to have the money to invest in the market. Last October, Bank of America started offering certain customers commission-free stock trades.
“The long-term growth opportunities of the brokerage industry are extremely compelling to Wachovia, and we have long expressed our interest in growing this business both organically and through acquisition,” Wachovia Chief Executive Ken Thompson said Thursday in a conference call with analysts.
Wachovia's purchase of A.G. Edwards also continues a string of high-profile acquisitions by the two Charlotte banks aimed at quickly boosting specific parts of their business.
Last November, Bank of America paid $3.3 billion for U.S. Trust, Charles Schwab Corp.'s private-banking and wealth-management unit. In October, Wachovia closed on a $24.2 billion deal for Golden West Financial Corp., which expanded its mortgage business even as the industry had slowed and gave the company a foothold in California, a state where it had just a handful of branch offices.
Still, Wachovia's play for A.G. Edwards came as somewhat of a surprise: Thompson had said the company was “out of the large deal business” while it integrated Golden West.
“Wachovia is keen on assembling a coast-to-coast financial services franchise to rival the big three banks,” wrote CreditSights analyst David Hendler in a research note, referring to Bank of America, and New York's Citigroup Inc. and JPMorgan Chase & Co. “(Wachovia) needed to snag A.G. Edwards when it was available, even though the timing may not have been ideal.”
Retail brokerages buy and sell stocks for individual investors, charging trading commissions and management fees. A.G. Edwards reported $3.13 billion in revenue last year, mostly from commissions and fees for brokering stocks, mutual funds, insurance and other types of securities for customers. Wachovia Securities had $5.25 billion in revenue.
“It's important to note that scale is generally more important to investment brokers than banks,” Poulos said. “That's why you see lots of small banks, but few small brokers.”
Once complete, the deal will nearly double Wachovia's nationwide chain of dedicated brokerage offices and give the bank a much wider footprint, particularly in the Midwest. Wachovia Securities will be America's second-largest retail brokerage by number of brokers, after Merrill Lynch & Co. Inc.; the company will be the third-largest brokerage by assets and number of locations.
Over the past four years, Wachovia has lost about 3 percent of its advisers through attrition. The bank said it does not see that number changing, but has set aside more than $1 billion for broker retention over the next six years, said David Carroll, head of Wachovia's capital management group.
“We have a lot to offer our brokerage advisers and we think we can make it economical for them,” Carroll said in an interview.
Once the deal closes in October, with full integration by early 2009, A.G. Edwards shareholders would get 0.9844 Wachovia shares and $35.80 in cash for each A.G. Edwards share held. That offer values A.G. Edwards Inc. at $89.50 per share based on Wednesday's closing prices, a 16 percent premium.
Wachovia shares fell 36 cents to close at $54.19. A.G. Edwards shares closed up $11.01, or more than 14 percent, to $88.16.