The Wall Street Journal-20080123-Deal Journal - Breaking Insight From WSJ-com
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Deal Journal / Breaking Insight From WSJ.com
Mortgage Deal Costs
Points for Wachovia
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A 40% Decline in Share Price
Cuts Market Cap $50 Billion
Since Closing on Golden West
Depending on how you look at it, it was either one of the best-timed or the worst-timed merger deals of all time.
We are talking about Wachovia's $24 billion acquisition of California mortgage lender Golden West Financial. The deal was announced in early May 2006. Its close, five months later, coincided almost perfectly with the peak in the U.S. home lending market, a fact made all-too-clear by Wachovia's 98% fourth-quarter earnings decline, announced yesterday.
The woes that have halved the share price of its larger rival, Citigroup, have diverted attention away from the dismal performance of Wachovia's stock. But of the four largest U.S. banks -- Citigroup, J.P. Morgan Chase, Bank of America and Wachovia -- only Citigroup's stock has performed worse than Wachovia's since the Golden West deal closed. The more-than 40% decline in Wachovia's stock since then has knocked nearly $50 billion off its market cap.
Wachovia chief Ken Thompson seems to have had the risks of the deal on his mind when it was announced. The news release from the time quotes him as saying: "For four decades, Golden West has taken industry-wide challenges in stride and maintained a singular focus as a risk-averse residential mortgage portfolio lender. The result is . . . virtually no credit losses realized even in the toughest year in its history."
That boast may have to be abandoned after Wachovia reported a $1.5 billion provision for credit losses, which "largely reflected the recent significant deterioration in the residential housing market and the related portions of the commercial real estate portfolio."
On Wall Street, of course, someone's loss is another's gain. So Herbert Sandler and Marion Sandler must be congratulated, not only for building Golden West into a financial colossus but for their impeccable timing in selling it. The deal valued the husband-and-wife team's stake at more than $2 billion. Alas, they remain big Wachovia shareholders.
-- Dana Cimilluca
M&A Boom,
'Insider' Boom
The recent leveraged-buyout boom saw more deals and more people involved in the financings of those deals than in previous booms. That may help explain an increase in suspicious trading activity in shares, options and debt derivatives ahead of deal announcements, a new academic study says.
The authors, Viral Acharya of the London Business School and Timothy Johnson of the University of Illinois at Urbana-Champaign, looked at about 200 buyouts from 2000 to 2006 and studied trading activity in shares, options, and credit-default swaps before announcements of the deals.
The results suggest "that more insiders leads to more insider trading," they said in their study, which also suggested that large firms with more banking relationships "are likely to see more leakage of nonpublic information."
The buyout boom of the late 1980s and early 1990s involved takeovers by many publicly traded companies as well as private-equity firms. Much of the fund raising in the capital markets to pay for those deals came from the sale of high-yield, or junk, bonds. The most recent buyout boom was driven largely by private-equity investors, and the deal financing involved sales of both junk bonds and leveraged loans. The latter were syndicated widely among banks and debt investors, including hedge funds and managers of large loan pools called collateralized loan obligations.
Participants in the syndicated-loan market, the authors noted, are privy to nonpublic information that the main bankers have gathered about companies. This, along with the trend of "club deals," in which multiple private-equity firms work together on a single buyout deal, mean more people know about predeal negotiations before a buyout bid is announced.
-- Serena Ng
