Part of being a great banker is knowing when and how to acquire competitors (and thus market share) for pennies on the dollar. No companies have done this better over the past decade than JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC).
The chart below illustrates this point by showing two things. First, the book values that Wachovia, Washington Mutual, and Merrill Lynch disclosed in their final quarterly filings before being acquired at the nadir of the financial crisis of 2008-09. And second, the purchase prices paid for these banks by Wells Fargo, JPMorgan Chase, and Bank of America (NYSE:BAC), respectively.
While Wachovia claimed a net worth of $50 billion dollars at the end of the third quarter of 2008 -- and that was after it took a $19 billion charge for goodwill impairment -- Wells Fargo paid a mere $15.1 billion for the sprawling East Coast lender. That equates to a 70% discount to book value. And while Washington Mutual last purported to be worth $26.1 billion, JPMorgan Chase picked it up for only $1.9 billion after the FDIC seized the Northwest deposit powerhouse and eagerly sought to get rid of it. Its discount amounted to a staggering 93% of book value.
To be fair, Wells Fargo and JPMorgan Chase each later absorbed billions of dollars' worth of losses stemming from these purchases -- perhaps even tens of billions of dollars' worth in the latter's case. But so did Bank of America with its purchase of Merrill Lynch, which the North Carolina-based bank paid a 44% premium to book value to acquire at essentially the same time the other two deals were announced.
This shows two things. First, that JPMorgan Chase and Wells Fargo aren't just good lenders; they're also talented when it comes to the more-often poorly executed strategy of growth by acquisition. Second, it serves as a reminder of the obvious point that the shrewdest investors buy bank stocks when they're selling cheap -- that is, for a discount to book value.
This isn't something that investors should get carried away with, of course, as banks generally trade at discounts to stated value for legitimate reasons. However, all else being equal, if you can wait to invest in the sector until everyone else is fleeing it, as Warren Buffett did with his purchase of 10% of Wells Fargo in the early 1990s, then you're bound to not only outperform other bank investors, but also the broader market at large.