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:
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Washington Mutual Ups Texas Position With Acquisition
Washington Mutual picks up Bank United and its 155 branches in a $1.5 billion all-stock deal. With the transaction, Washington Mutual gets a higher profile in the Texas market, an economy that is growing faster than the national average. Bank United gets access to WaMu's spectacular credit rating.
By Bill Mann – Aug 21, 2000 at 12:00AM EST
About the Author
Bill Mann is Chief Investment Strategist at Motley Fool Asset Management (“MFAM"). Bill has held leadership positions in both MFAM and its sister company, The Motley Fool, LLC, including serving as the founding Chief Investment Officer at Motley Fool Asset Management from 2009 to 2017. He has most recently served as the Director of Small Cap Research for The Motley Fool, LLC. Bill continues to be a trusted voice for investors, most recently as a former co-host of the Motley Fool Morning Show and sharing insights on investing and markets.