WHEN BANK OF AMERICA bought credit card company MBNA for $35 billion in June, shares of another major bank headquartered in Charlotte, North Carolina took an immediate hit. Investors were convinced that Wachovia, having missed out on the chance to buy MBNA, would be forced into a hasty, large and highly dilutive acquisition.
The heat was on Wachovia, the fourth-largest US bank by assets after Bank of America, Citigroup and JPMorgan Chase. Stories circulated of reporters camping out in the lobby of Wachovia One in Charlotte to see if they could spot anyone arriving for meetings on the executive floor there. Among the many theories circulating, one suggested that Wachovia was on the verge of tying up with Morgan Stanley. Indeed, Wachovia was said to have been mentioned as a possible partner at a Morgan Stanley board meeting last summer.
Shareholders didn't have to wait too long for Wachovia's next move, although it wasn't the blockbuster that everyone had expected. On September 12, the bank announced that it was buying California-based Westcorp and its majority owned auto lender WFS Financial for approximately $3.9 billion, making it the ninth-largest auto lender in the US. The next day it said it acquired AmNet Mortgage, also in California, for $83 million.
The deals were an important statement to the market. Wachovia would not be diverted from its chosen course by outside pressures. The bank's chairman and CEO Ken Thompson had assured shareholders that any future deals would have to produce a 15% internal rate of return and add to earnings on a cash basis in its second year. With these deals he has kept his word.
"People are always worried about us doing some terribly dilutive acquisition," says Wachovia CFO Bob Kelly. "That's in spite of the fact that the acquisitions we have done in the past few years have been extremely successful for shareholders. We've had five years of outperformance, and the market isn't giving us credit for it."
Wachovia's management don't expect the outperformance to end here. Thompson is not a man to mince his words – he says the bank's long-term goal is "to be the best, most trusted and admired financial institution in the US." For one, the map showing Wachovia's state-by-state retail presence in the US in his office in Charlotte has some notable gaps he would like to fill.
But he has ruled out the idea of a major investment-banking merger, for the moment at least. "We will participate in that M&A activity as it meets the financial requirements that we've set out for shareholders," he says. "But we spend most of our time on organic growth and that's particularly true in our corporate and investment bank. We're not really interested in making acquisitions there."
And it's that organic growth in Wachovia's fledgling investment banking business, notably over the past 12 months, which has attracted both the concern and attention of its competitors on Wall Street, particularly at a time when other US firms have been retrenching.
To the outside world, Wachovia is best known as a major east coast retail and consumer banking franchise in the US, with a nationwide retail brokerage attached. It's not the first place you'd think of for cash equities or M&A advisory. Yet that's exactly what it is developing. After a major expansion drive to grow its fixed-income platform, which started 15 months ago, Wachovia Securities, Wachovia's corporate and investment bank, is building out its equity capital markets, M&A and investment banking coverage teams. Management decided it would start hiring to bolster these areas last summer. Since then, it has added about 300 extra people to the corporate and investment banking division.
Market share
The goal is to increase Wachovia's share of lead-managed stock offerings in equities and win more advisory mandates in its M&A business by focusing on expanded coverage of 10 target industry sectors, expanding its fee-based work with more large-cap companies, starting with those with which the bank has lending relationships. It's part of a plan to double the market share of the corporate and investment bank from its current 3% level over the next three years.
Many of Wachovia's recent hires have been at a senior level. It hired Jonathan Weiss, global head of the financial sponsors group at JPMorgan, who had been at the bank for 25 years, to head Wachovia's push in attracting financial sponsor clients. In April, it hired a new head of M&A, Robert Engel, who had spent 15 years at Gleacher Partners, most recently as head of mergers and acquisitions and restructuring. Quinten Stevens, JPMorgan's co-head of equity capital markets in the Americas, joined the bank in May to head its newly reorganized equities division.
In July, Stevens hired Morgan Stanley veteran of 18 years Brad Hu, the bank's global head of equity product innovation, and Duff Anderson, most recently head of investment banking at Dominick & Dominick. Wachovia has also built up its equity research and syndicate divisions. In July, Stevens brought in Lear Beyer, the former head of US ECM private equity at Citibank; Jerry Raio, head of closed end funds at Citigroup Asset Management; and Elizabeth DiChario, director in ECM at CSFB.
Many of the hires Stevens has made since he got to Wachovia are people he has known for years. "Duff [Anderson] actually tried to hire me at one point in time," he says. The bank has also made several investment banking coverage and M&A hires over the last few months, right into August when David Bain and Michael Wilkins joined the M&A group from Dresdner Kleinwort Wasserstein and James Broner joined from Bank of America.
As well as importing some of the best Wall Street talent, the Charlotte-based bank is making a much bigger commitment to New York. It is shutting its existing equities operation in Baltimore, laying off some staff and moving the rest to Manhattan, where many of the new hires will also be based. It has leased five floors of the Seagram Building at 370 Park Avenue, which will have 700 trading seats. The first wave of staff will move in December, the rest in January and February next year. A newly consolidated equity capital markets, equity derivatives and equity-linked group will be based in New York, along with financial sponsors coverage.