Wachovia-Golden West:<br /><i>Risky Step or Measured One? Taking an Oath</i>

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Another measured step in Wachovia Corp.'s expansion or a step too far?

That was the question analysts seemed to wrestle with on Monday in the wake of Wachovia's $25.5 billion deal for Golden West Financial Corp.

In size terms, Golden West is in a different category from the bank deals undertaken by CEO, president, and chairman G. Kennedy Thompson. It is nearly double in size the $14 billion acquisition First Union Corp. struck for Wachovia before taking its name.

Several analysts downgraded the Charlotte company's shares Monday, citing concerns about the operational risk presented by Golden West's option adjustable-rate mortgage operations.

However, others said that the deal was emblematic of Mr. Thompson's systematic and disciplined approach to acquisitions, with one referring to the deal as evidence of the executive's practice of "keeping promises" - in this case pledges to expand in consumer lending and in California.

In an interview Monday, Mr. Thompson said he found the reaction of some analysts "a little bit frustrating." Option ARMs "obviously have a bad name, but Golden West has the most conservative product out there."

During a conference call earlier in the day with analysts, Mr. Thompson had briefly addressed concerns about Golden West's upcoming transformation.

"Here is my promise to you," he said. "Like the Hippocratic oath, we will do nothing to screw up that model. We will only add to it."

During the call Mr. Thompson presented the deal as a continuation of a growth plan well under way at his $542 billion-asset company.

The deal "rapidly increases the California growth plan that we had in place" and "bulks up and accelerates our growth plans in Texas," he said.

Wachovia, which has also been vocal about its desire to focus on consumer banking and began reissuing its own cards this year, has been expanding in California, where it has completed two consumer transactions in the past six months.

In December, Mr. Thompson said, "I believe that the consumer for the rest of my life is going to be a pretty good place to place your bet." That month his company acquired the San Diego home lender AmNet Mortgage Inc. for $83 million. In March, Wachovia acquired Westcorp Inc. of Irvine, Calif., and WFS Financial Inc., an auto finance company mostly owned by Westcorp, for $3.9 billion.

The deal for Golden West, the parent of World Savings Bank, is expected to close in the fourth quarter. Wachovia would become a top five banking company in the West while gaining significant scale in the mortgage business.

Golden West has $128 billion of assets and 285 branches, including 123 in California, where Wachovia gained 19 branches through its purchase of Westcorp.

Buying Golden West would expand Wachovia's operations in Florida and Texas and bring it into to Colorado and Arizona.

During the call, Mr. Thompson said buying Golden West would make Wachovia one of the six largest banking companies in Los Angeles, San Francisco, Denver, Houston, and Phoenix. Wachovia's asset total would rise to $686 billion, still the nation's fourth-biggest. (The top three banking companies have more than $1 trillion.)

Mr. Thompson called Golden West a "crown jewel" that his company had long "admired," but one that "we just never thought we would ever have a chance to do a combination with." During the conference call, he said he was "thrilled" to be approached by Golden West's representatives.

(A Wachovia spokeswoman would not discuss a report Monday in The Charlotte Observer that said Golden West started negotiating with Wachovia after unsuccessful discussions with Citigroup Inc. and HSBC Holdings PLC. Spokesmen for Citi and HSBC also would not discuss the report.)

Some analysts said they were surprised at the deal.

Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, said in an interview that the size and scale caught investors by surprise in a way that creates "a disconnect" from recent acquisitions.

Michael Mayo, an analyst at Prudential Equity Group LLC, lowered his rating for Wachovia's stock to "underweight," from "neutral weight," and wrote in a note to clients that the deal presents three main issues: high operational risk, dilution of Wachovia's long-term growth rate, and terms that were "not cheap."

Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said the biggest issue is whether Wachovia can transform Golden West without taking a major hit to earnings growth.

"When you transition from a one-product model to a multiproduct model, you are going to lose some earnings growth," he said in an interview. "The deal appears to be measured, but the real question is will it be successful?"

However, Robert Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., wrote in a report that Wachovia "has been in the business of making and keeping promises" and clearly communicated to investors a desire to build scale in auto lending, credit cards, and mortgages. He maintained an "outperform" rating for Wachovia stock.

Wachovia projects that the Golden West acquisition would be neutral to operating earnings in 2009, add a penny a share to cash earnings in 2008, and generate $53 million of after-tax cost savings and $293 million of merger-related expenses. The company also plans to upgrade Golden West branches; few of them have automated teller machines, and many of them lack drive-throughs. Wachovia would add two Golden West directors to its board. The deal includes a $995 million breakup fee.

During the conference call, Thomas J. Wurtz, Wachovia's chief financial officer, said the company could save more money by decelerating its branch-building. Wachovia executives have said in recent months that it could open 200 branches in California over the next five years, and that it could continue to open 50 branches a year in Texas.

The deal "does represent an opportunity to step back, take a little breather, do that a little slower," Mr. Wurtz said.

As with its other large acquisitions under Mr. Thompson, Wachovia would take its time integrating Golden West. He said during the call that it would likely wait until the fourth quarter of next year before taking on the California branches and even longer to integrate the remaining branches.

Wachovia expects to close 55 branches and cut 1,100 jobs, including 225 to 250 resulting from the branch closings. Executives said it does not anticipate many cuts among employees who deal with the public.

Herb Sandler, a co-chief executive of Golden West, said during the conference call that the company he co-founded with his wife, Marion, could have doubled in size as a stand-alone.

"We operate in a very narrow niche, and we do it extraordinarily well," he said. "But the negative is that we are, in fact, a monoline company. … You can just go so far as a one-product company."

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