WaMu Rebuffs a Sweet Offer

Is JPMorgan Chase (NYSE: JPM  ) out to conquer the world? Just weeks after pulling troubled investment bank Bear Stearns (NYSE: BSC  ) out of the mud, it now appears that talks had been well under way for the House of Morgan to acquire Washington Mutual (NYSE: WM  ) -- but not anymore.

According to The Wall Street Journal, WaMu CEO Kerry Killinger contacted JPMorgan boss Jamie Dimon back in March, admitting that his company was on the rocks and management was willing to talk to those able to lend a hand. JPMorgan expressed interest in acquiring the troubled savings and loan, and didn't consider WaMu's mortgage assets as untouchable, as the rest of the market seemed to.

Deal or no deal?
Just last week, WaMu's top brass received a preliminary offer of around $8 per share in JPMorgan stock, which they quickly turned down. WaMu execs hinted that the terms of the deal were murky at best, and worth potentially less than the proposed $8 per share.

At the time, WaMu shares traded hands at around $10 per share. An $8-per-share buyout would have likely touched a nerve with investors, perhaps leading to a shareholder revolt similar to the Bear Stearns snafu. Most corporate buyouts are done at a premium to the prevailing share price, but when survival is a priority, desperate measures may result.

Yesterday, WaMu announced it had obtained $7 billion of new capital from private equity group TPG Capital and other investors in a last-ditch attempt to shore up its crumbling balance sheet and continue as a healthy, stand-alone company.

Did WaMu make a good decision? Only time will tell, but it's not hard to piece together how shareholders would have benefited from a JPMorgan adoption. The $7 billion capital infusion WaMu will undergo will dilute existing shareholders' stake drastically, and it could seriously hinder a rebound when the credit hoopla takes its final bow.

The all-stock offer from JPMorgan, however, would have swapped WaMu shares for a stake in JPMorgan, which has become the go-to financial powerhouse in recent months. The Federal Reserve handpicked JPMorgan as Bear Stearns' only hope for survival. That says an awful lot about the firm's financial clout.

JPMorgan's got serious momentum
If JPMorgan can integrate Bear Stearns into its platform successfully, it could set itself up to become a serious threat to once-untouchable investment-banking competitors, including Goldman Sachs (NYSE: GS  ) . Add in a regional bank like WaMu, with its large mortgage outfit, and JPMorgan could give Bank of America (NYSE: BAC  ) -- whose pending acquisition of Countrywide Financial (NYSE: CFC  ) could make it the largest mortgage lender in the country -- a few sleepless nights.

In times of peril, the strongest of the strong feast on competitors' famine, positioning themselves for growth once the storm clears. That seems to be what JPMorgan is doing right now. If I had to guess whose stock will perform better in the coming years -- JPMorgan, with the new Bear Stearns assets it practically got for free, or WaMu, with its massive share dilution -- I'd pick the former in a heartbeat.

While WaMu shareholders might have felt slightly wronged by an $8-per-share offer, their results over the next several years would likely outpace those achieved by WaMu on its own. On top of its new share dilution, WaMu announced yesterday that it would slash its quarterly dividend to a measly $0.01 per share, and that it expects a first-quarter loss of $1.1 billion, loan loss provisions of $3.5 billion, and charge-offs of $1.4 billion.

On the other hand, analysts expect JPMorgan to earn $3.38 per share this year; it has the Fed-backing Bear's riskiest assets, and it's quickly gaining confidence from investors -- an absolutely crucial asset in times like these. If you had your choice, which one would you pick?

Warren Buffett was turned down from Harvard, Yahoo! shunned Microsoft's generous offer, and now WaMu has rejected a valuable opportunity from JPMorgan. Not everyone can spot a good deal when they see one.

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