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Wachovia:
California Dreaming
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By Stephen D. Simpson, CFA
September 14, 2005
Maybe the management at Wachovia (NYSE: WB) really likes Disneyland,
or maybe they want to catch up on their surfing. Whatever the
case may be, they've gone all the way to California twice this
week for acquisitions.
In the wake of announcing its intent to acquire auto-lending
specialist Westcorp (NYSE: WES), Wachovia announced another deal
to acquire mortgage banker AmNet Mortgage (Nasdaq: AMNT) for
$10.30 a share in cash.
AmNet Mortgage does business as American Mortgage Network, a
wholesale mortgage bank that serves about 7,000 mortgage brokers.
With about $1.9 billion in warehouse facilities (in other words,
available financing), AmNet writes mortgages primarily for prime
customers and then sells off those mortgages.
Though AmNet originally started out as a REIT that held residential
mortgages for investment, the company decided to switch to mortgage
banking in 2001. Two years later, in 2003, the company abandoned
its REIT status and does not presently pay a dividend.
For Wachovia, this is another way to not only expand into California
(where AmNet does about one-quarter of its business) but also
to compensate for losing out on MBNA, which is being acquired
by rival Bank of America (NYSE: BAC). It will be interesting
to see whether Wachovia maintains AmNet's practice of selling
roughly half of its mortgages to Countrywide Financial (NYSE:
CFC), as well as a significant chunk to Wells Fargo (NYSE: WFC).
Should investors be worried about Wachovia shelling out some
cash for a mortgage banking business amidst all the talk of a
housing bubble? Well, the CEO of Wachovia doesn't feel there
is a bubble. But then again, he makes his money off of a healthy
mortgage market. Nevertheless, Wachovia generally shies away
from riskier mortgage lending (like investment properties) and
is pretty well diversified across many markets.
With that in mind, I'd probably focus on the long-term strategic
advantages of building a stronger national mortgage business
and a deeper foothold in California, rather than worrying about
buying at or near the top of an alleged bubble. After all, Wachovia
didn't get to be this big by being chronically stupid. I think
they deserve the benefit of the doubt.
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