Wachovia Corp.'s deal to buy Golden West Financial Corp. may send ripples through the California banking market, but it would not make the Charlotte banking company a heavyweight in the state overnight, observers say.
To become a household name there, the $542 billion-asset Wachovia needs to remake Golden West in its own image and cross-sell its far wider product set to the Oakland, Calif., thrift company's customers.
"They can be competitive in California if they are willing to spend the money to make the changes," said Gary Townsend, an analyst at Friedman, Billings, Ramsey Group Inc. in Arlington, Va.
The $25.5 billion deal, expected to close in the fourth quarter, would make Wachovia the sixth-biggest depository institution in the state, according to June 31, 2005, data from the Federal Deposit Insurance Corp. (At the end of June it was the 32nd-biggest.)
However, Wachovia would still trail companies like Bank of America Corp., Washington Mutual Inc., and Wells Fargo & Co., the top three deposit holders in California, which held a combined share of 50% at midyear.
Acquiring Golden West would give Wachovia an extensive network of branches, including 123 in California. It would also become one of the country's largest option adjustable-rate mortgage lenders.
"Everyone would have to say … [Golden West] is the best option ARM lender out there," Fred Cannon of Keefe, Bruyette & Woods Inc., said in an interview Monday.
But demand is slowing for Golden West's single mortgage product in the current interest rate environment.
Observers said Wachovia would likely be able to adjust to the slowdown, because it could offer customers of Golden West's World Savings Bank other mortgage products, including fixed-rate loans. However, Mr. Townsend and others said that World Savings' branches are not in the greatest shape, or in prime locations. Also, the branches are populated by workers who do not cross-sell, and they are frequented by older customers who do not want automated teller machines, observers say.
In announcing the deal Sunday, Wachovia said it would spend $34 million to upgrade things like branches and systems. It would put its name on the California branches in the fourth quarter of next year.
During a conference call held Monday to discuss the deal, Wachovia chairman, president, and chief executive G. Kennedy Thompson, said that before that conversion his company would train Golden West employees and hire financial specialists, "so that on the day of conversion, when the name becomes Wachovia and the systems change, we will have a branch that will be operating with the new product set, and we will also have taken steps to make sure that every customer of that branch is contacted and knows exactly what is going on."
On Thursday, the company did not comment by press time.
Peter Kelly, a co-leader of the banking practice in the Los Angeles office of the executive recruiting firm Highland Partners, a unit of Hudson Highland Group Inc., said Golden West "gives them the opportunity, I suspect, with the large number of branches, to leverage their other lines of business."
Wachovia already has 4,500 employees, or 4.5% of its work force, in California in several business lines, including Wachovia Securities and Wachovia Small Business Capital. In February it acquired the Irvine banking company Westcorp and WFS Financial Inc., an auto-finance company that was 84% owned by Westcorp.
But Wachovia would have a lot of catching up to do.
"We are in this endgame in California. We have three big franchises out here - B of A, Wells Fargo and Wamu - that are very entrenched," Mr. Cannon said. The question for other big banking companies, such as Citigroup Inc., U.S. Bancorp, and Wachovia, is "Can someone develop a fourth meaningful player in the market - or get to the size where they are clearly a national player that can vie with the Big Three in California?"
Analysts say Citi has not capitalized on its 2002 purchase of Golden State Bancorp, the parent of California Federal Bank. That purchase gave the $1.6 trillion-asset New York company 336 branches in California. Today it has 373 in the state, and at the end of June it had the No. 5 deposit share, according to the FDIC.
Wachovia would be a better retail competitor than Citi, analysts say. (Last year Wachovia led retail banking companies in the University of Michigan's American Customer Satisfaction Index for the fifth straight year.)
Wamu has demonstrated that acquisitions, combined with the right product, free checking, and clever marketing, can pay off in the Golden State. The Seattle thrift company's first major thrust in California came in 1996-98. In that three-year period it bought the $20 billion-asset American Savings Bank of Irvine, which had 125 branches; the $43 billion-asset Great Western Financial Corp., which had 416 branches in California and Florida; and H.F. Ahmanson & Co., the parent of the 335-branch Home Savings of America.
At an investor conference Tuesday in Seattle, Steve Rotella, the chief operating officer of the $349 billion-asset Wamu, welcomed Wachovia's expansion plans. "We obviously have a very large presence in terms of retail stores and mortgage banking operations, and we think we'll continue to succeed very nicely in California with Wachovia in the marketplace."
The $1.38-trillion asset B of A is also firmly entrenched in California. In 1998 the Charlotte company bought BankAmerica Corp., which was founded in San Francisco in 1904.
Analysts said they do not think that executives at Wells are huddled in its San Francisco headquarters a panic right now.
"I don't think people are getting their heads together at Wells and saying, 'Oh, what are we going to do? Are we going to change?' " Joe Morford of Royal Bank of Canada's RBC Capital Markets in San Francisco, said Tuesday. "They are still the hometown bank here - bigger footprint across the state, well known, good brand identity, everybody knows their stagecoach here, good market share, their people are entrenched."
But Richard X. Bove of Punk, Ziegel & Co., said he believes Wachovia's expansion on the West Coast could have two significant ripple effects on the merger and acquisition front: making Wamu a more likely takeover target and forcing the $492-billion Wells to finally seek to expand in the east.
"There are six companies now sitting on the West Coast that have national or international franchises, and Wells doesn't. That puts the company at a significant competitive disadvantage," he said.
A spokeswoman for Wells said it would not comment for this story. Wamu would not discuss takeover speculation.
During an investor conference Tuesday, Bruce L. Helsel, a senior executive vice president and head of corporate development at Wells, repeated its attitude about deals. "We really don't need to do acquisitions to increase our distribution network," he said.
