America's largest thrift, Washington Mutual (NYSE: WM), made known its intention to transform itself from a bit player in the Texas savings and loan market to one of the big boys by announcing a merger with Bank United (Nasdaq: BNKU). This acquisition provides WaMu with an additional 155-branch presence in Texas, a more diverse asset and regional base, and an increased residential mortgage portfolio.

The all-stock transaction is currently valued at $1.5 billion, which represents a 70% premium over Bank United's book value. This compares with the purchase WaMu made of A.H. Ahmanson two years ago in which it paid more than three times book value. But interestingly, Bank United has a large portfolio of non-thrift businesses, including a residential mortgage portfolio. Given the current economic environment, investors would be justified to wonder why Bank United did not command more of a premium.

One answer would be risk. Fitch, a credit rating agency, has rated Bank United only a "BBB" as compared to WaMu's "A" rating, in part due to the composition of its commercial loan portfolio. A large portion of Bank United's loan book has been deemed "unseasoned" by some industry observers, who note that these loans have originated in the strong economic environment of the last few years, so while they have excellent credit histories to date, there is insufficient evidence of how they will perform in a downturn. WaMu for its part has increased its loan diversity over the last few years by originating some higher-yielding loans, so the combination with Bank United will greatly accelerate this strategy.

In other words, this deal could quickly be a boon to shareholders of both companies. WaMu gets a big presence in Texas, where the economy is growing faster than the U.S. average, and it gains significant commercial and residential portfolios. Bank United gets tied in with a national thrift, and will enjoy the benefits of access to capital at WaMu's gilt-edged rating.

Your Turn:
What do you think of the deal? Both companies' stocks got hit today, but that's not very important to the fundamentals of the deal. Come tell all on the Washington Mutual discussion board.

Related Links:
Washington Mutual website