Analysts see JPMorgan Chase as suitor for Wachovia

by Katy Finger

(The Business Journal of Milwaukee)Wall Street analysts say the ouster of Ken Thompson as Wachovia Corp. chief executive could lead to a sale of the bank, with JPMorgan Chase & Co., which has a large Milwaukee-area presence, identified as the most likely buyer.

Even without such a sale, Charlotte, N.C.-based Wachovia (NYSE: WB), which has no Wisconsin bank branches, is facing a period of significant change that some analysts view as a chance to improve the bank's earnings but others expect will mean more weakness and uncertainty.

"Under Ken Thompson's leadership, he took a defeated First Union franchise and transformed it into one of the premier retail banks in the country and significantly improved profitability," wrote Citigroup Global Markets Inc. analyst Keith Horowitz in a research note Monday. "Unfortunately, his legacy will more likely be defined by the ill-timed Golden West acquisition, which left Wachovia very exposed to the mortgage crisis."

Wachovia has been hit by a string of bad news in recent months, but the company's financial woes have revolved largely around its massive exposure to the declining mortgage market, a byproduct of its 2006 acquisition of Golden West Financial Corp., a California thrift that specialized in nontraditional, option-adjustable-rate mortgage loans. The deal put Wachovia in California and other Western states, but the bank bought the thrift at the peak of the mortgage market and has become swamped with defaulting mortgage loans.

Thompson has since conceded the acquisition was poorly timed.

The bank also recently cut its dividend to 37.5 cents per share from 64 cents per share while raising $8 billion in new common and preferred stock, which diluted the value of existing shareholders' stock.

Several analysts think a sale to New York City-based JPMorgan (NYSE: JPM) may be likely. JPMorgan Chase entered the Milwaukee market with its 2004 purchase of Bank One of Chicago. Chase is now the third-largest bank in the Milwaukee area based on local deposits.

"JPMorgan would be regarded as the most likely buyer," wrote Edward Najarian, research analyst at Merrill Lynch & Co. Inc., in a research note Monday. He points out that JPMorgan's CEO, James Dimon, has said he would like to expand JPMorgan's branch network in the Southeast. "He would also likely find Wachovia's over 14,000 retail brokers an attractive asset," he wrote.

Deutsche Bank analysts also say Wachovia offers what JPMorgan wants. "JPMorgan has indicated at times that it would be interested in franchises that include a combination of California, Texas, Florida and brokerage," analysts Mike Mayo and Chris Spahr wrote Monday, "and Wachovia contains all of these."

However, after JPMorgan, "potential buyers dwindle materially," Merrill Lynch's Najarian wrote. Charlotte, N.C.-based Bank of America Corp. (NYSE: BAC) is an unlikely suitor because of antitrust issues, he wrote. And Citigroup Inc. (NYSE:C) doesn't have the capital, he wrote.