Back in mid-July, I presented the idea that Wells Fargo (WFC) and US Bank (USB) are the two best-positioned banks, and are therefore the only bank stocks worth owning. Both are up about 25% since, against a single-digit rise in the KBW Bank Index (ETF ticker: KBE), though that hardly captures the entire picture as a non-diversified set of bank holdings could have easily gotten your portfolio killed.
The particular irony here is that while I praised the prudence and conservatism of Wells and US Bank in that post, I also ripped on Wachovia (WB) and their low loss reserves, which I speculated would have shown the company to be effectively bankrupt if they were “trued up” to something reasonable. Fast forwarding, and Wachovia’s independence is all but gone and they are caught in a takeover fight between Citigroup (C) and the same Wells Fargo that I liked for staying clear (so far) of this credit mess.
Now that Wells Fargo is wading in to the acquisition arena with a $15 billion (give or take, not including assumed debt) all-stock bid for Wachovia, is it a sign they’ve grown impatient from sitting on their hands as undercapitalized and less-rigorous institutions failed, or was this a shrewd time to strike? The bid values Wachovia at 1.3x 2007 pre-tax, pre-provision earnings; by comparison, Wells Fargo trades at 6.9x the same metric. Throw in the recently clarified rule about tax offsets for losses from an acquisition and the fact that Wells can still raise equity capital, and this could actually work out for them.
Of course, there is another nuance worth noting – Wells isn’t offering cash for Wachovia, they’re offering their stock, which has performed fantastically relative to your typical financial. A high priced stock is a great currency for acquisitions, and a smart management team will take advantage of that. Given that Wells Fargo stock is still (incredibly) within spitting distance of its peak price-to-book multiple in the post-2000 bubble era, I imagine that this confluence of factors provided a powerful incentive for Wells’ management team to make the offer they did.
The chart below shows the trailing 10-year average price-to-book multiples of Wells, US Bank, Citi and Bank of America (BAC) – with US Bank’s valuation holding up even better than that of Wells, will it be long before they too look to take advantage of that and make acquisitions of weaker rivals?
