By Lawrence A. Rothman, CFA
September 21, 2007
If A.G. Edwards (NYSE: AGE) keeps posting results the way it did this quarter, acquirer-to-be Wachovia (NYSE: WB) will be considered a wise investor.
Earnings shot up more than 45% to $1.25 a share, crushing the consensus estimate by $0.12. Revenues rose 15%, to $821.5 million. The company credited higher asset-management fees and commissions, but you just know Wachovia's management team is smiling, no matter the cause.
It's increasingly difficult for smaller, regional brokerages to compete, given the smaller commissions being charged. In fact, other regional banks are rumored to be on the block, including Raymond James (NYSE: RJF). However, A.G. Edwards will have Wachovia's vast capital to allow it to compete and do more underwriting. Wachovia, in turn, will get a broader broker distribution. The combined entities will create the second-largest retail brokerage and should be able to wring out costs, especially in administrative and back-office operations.
The deal with Wachovia should be completed shortly, and I think it's a good one for both parties. A.G. Edwards shareholders will receive $35.80 in cash plus 0.9844 of a share of Wachovia stock for each A.G. Edwards share they hold. The retail brokerage unit will be headquartered in St. Louis, but other units, such as research, asset management, and investment banking, will be consolidated with existing Wachovia businesses.
Wachovia has done a nice job integrating its acquisitions, including six brokerage firms and the large Golden West Financial, since 1998. The smooth process and successful acquisitions have helped lead to bottom-line growth in the double digits.
A.G. Edwards shareholders should be pleased with the deal. I'd suggest that they hold on to their stake in Wachovia. It has a nice, diverse stream of revenues, including net interest income, asset management, commissions, and investment banking, and the merger should only help diversify A.G. Edwards' revenue stream. At less than 11 times earnings, along with a nice 4% dividend yield, these shares are worthy of serious consideration.
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