FOOL PLATE SPECIAL
Washington Mutual, the country's largest savings and loan, made a commitment to move into the New York market in a big way, buying well-respected Dime Bancorp in a $5.2 billion deal. "WaMu" has made moves to expand into new markets in recent years, building on its traditional base in California and the Pacific Northwest, but this morning's buyout price (only an 11% premium to Friday's close) may indicate that S&L valuations are a bit ahead of themselves.
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Washington Mutual (NYSE: WM), America's largest savings and loan, announced early this morning that it would acquire Dime Bancorp (NYSE: DME) for $5.2 billion, or $40.88 per share. In a fairly strange turn of events, Dime's stock price actually fell Friday as news of the potential merger leaked out. In most situations, the stock of an acquisition target goes higher to anticipate the premium that the purchaser will pay. In this case, the rumored takeout price only represented an 8% premium to the company's market capitalization. (In the end, it came to about 11% based on Friday's close.) Evidently this wasn't enough for some investors. But premiums are generally good things, even if smaller than expected. Actually, the small premium might be taken as a signal that the valuations of S&Ls are a bit ahead of themselves: "WaMu," a fairly conservative shop, is not likely to be overly influenced by market sentiment at any one point when making a determination of value. Dime has more than doubled in price over the last year, as has WaMu. (In case you're interested, I asked Jeeves for a simple description of the difference between an S&L and a bank.) This acquisition is a pretty good fit for Seattle-based WaMu -- which has a mortgage loan portfolio that has its largest concentration in California -- as Dime's New York base will help limit WaMu's exposure to the economic swings of any one state. This deal also ends Dime's merger proceedings with Hudson United Bancorp (NYSE: HU), which seemingly began when dinosaurs roamed the earth. I have to admit I'm a bit saddened by the news of this takeover. Is it just me, or does a bank named "Dime" remind anyone else of the classic Saturday Night Live commercial spoof for the First Citiwide Change Bank? "All the time, our customers ask us, 'How do you make money doing this?' The answer is simple: Volume." Adding markets one region at a time If the market-by-market approach sounds familiar to Fools, that's because it is used to great success by two companies we admire: Starbucks (Nasdaq: SBUX) and Best Buy (NYSE: BBY). Don't fire up the merger bandwagon This may be true, but individual investors would be unwise to try to play off of this possibility. The small premium for this deal suggests that the sector is somewhat aggressively valued, so investors would really be counting on merger speculation as their short-term drivers for these companies. Unless you've got some specific insight into one or two of these companies, don't bother. This isn't to say S&Ls are not good long-term investments. They are, and they generally perform well in times of falling interest rates, so they tend to climb when other companies fall. For most of these companies, however, there is little margin of safety in current prices. Unless another localized growth driver can be identified, investors should tread carefully. Bill Mann is not going to give you two thousand nickels. His stock holdings can be viewed online, as can The Motley Fool's disclosure policy.
According to WaMu CEO Kerry Killinger, this transaction will give the company a foothold in the Northeast to offer its products. WaMu's strategy for acquisition has generally been to focus on regions where it had no previous presence -- another example is last year's buy of Bank United in Texas. New York and the Northeast provide intriguing markets for WaMu, which offers totally free checking to middle-market individual customers, a segment the big money center banks have generally ignored. WaMu has enjoyed double-digit growth for each of the last five years for this product, which has driven other fee-generating activities.
As for a wider market implication, many pundits believe this deal will put other New York-based thrifts -- including Astoria Financial (Nasdaq: ASFC), North Fork Bancorp (NYSE: NFB), and GreenPoint Financial (NYSE: GPT) -- into play.
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