Criticizing the Deal

The criticism of the Wachovia/Golden West has officially begun:

“It’s a high price, and this adds more cyclicality to their earnings stream, which always puts downward pressure on its price-earnings multiple,” said Jim Russell, director of core equity strategy at Fifth Third Asset Management in Cincinnati, which owns Wachovia shares.

It doesn’t seem that high too me. The deal price of $81.07 is only about 15 times this year’s estimate. True, the mortgage biz is getting soft, but few banks can offer GDW’s market position. Wachovia’s shares are down about 5% this morning.

Analysts said the purchase will dilute Wachovia’s operating earnings per share by some 2.5 percent in the first year, and increase its exposure to volatile mortgages.
Gimme Credit analyst Kathleen Shanley wrote that the thrift’s loan portfolio, 63 percent of which is in California, “could be vulnerable in a prolonged downturn.”
Prudential Equity Group LLC analyst Michael Mayo downgraded Wachovia to “underweight” from “neutral weight,” saying the purchase “dilutes long-term growth rates.”
Gary Townsend, an analyst at Friedman, Billings, Ramsey & Co., downgraded Wachovia to “market perform” from “outperform,” seeing no “strategic imperative” for the purchase.

Posted by on May 8th, 2006 at 11:17 am


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