Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

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WACHOVIA-WELLS FARGO- CITIGROUP Presenters: Arthur, Jan, Tip

description

The Merger between Wells Fargo and Wachovia.

Transcript of Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Page 1: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

WACHOVIA-WELLS FARGO- CITIGROUP

Presenters: Arthur, Jan, Tip

Page 2: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Outline

• Synergy Calculations• Simple (operational and financial)• DDM (theoretical)• Exchange ratio

• Ethics• Post-merger performance• Conclusion

Page 3: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Benefits of Wachovia Acquisition

• Why did Wells Fargo decide to acquire Wachovia?• Unparalleled market

position and larger market share

• Stronger retail distribution and customer base

• Higher combined competitive advantage

Page 4: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Synergy Calculation – Simple

• Synergy benefits: operational and financial

- Operational - $5 billion annual cost saving for 5 years, starts end of 2010, WACC=7%

“Majority of cost synergies achievable by end of 2010” NPV = $17.91 billion > $10billion

- Financial – Tax saving, approximately $20 billionCost of integration = 10 billion

Net synergy = 17.91 + 20 -10 = $27.91 billion > $15.1 billion

Page 5: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Sensitivity Analysis (Operational)

Synergy(In

billions)

Discount rate

4% 6% 7% 8% 10%

4 16.78 15.42 14.79 14.20 13.10

5 20.58 18.74 17.91 17.12 15.66

T 6 24.23 21.88 20.82 19.82 18.00

7 27.75 24.84 23.54 22.32 20.12

8 31.12 27.63 26.08 24.63 22.05

Perp. 112.19

71.37 59.85 51.27 39.39

T: number of years of cost savings last since 2010Discount rate: WACC = 7% according to our calculation

Page 6: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Synergy Calculation – DDM

• DDM Valuation assumptions:• Long term bond rate: 4.50%• Risk premium for the market: 8.50%• Length of high growth period: 5 years• Estimated cost savings from economies of

scale by merger: $5 billion p.a.• Estimated increase in ROE accruing from

merger: 1% • Estimates increase in the length of high

growth period: 1 year

Page 7: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Synergy Calculation

Value of Synergy based upon these inputs cost savings 5000 bil p.a. ROE by 1% and 1 yr more RGP 87,413$ Value of Synergy based upon these inputs No cost saving, ROE by 1% and 1 yr more RGP 7,680$ Value of Synergy based upon these inputs No cost saving, no ROE increase, 1 yr more RGP 2,201$ Value of Synergy based upon these inputs No cost saving nor ROE and extention 2,181$

Wells Fargo Wachovia New Wells Fargo New Wells Fargo with synergyNet Income 8,057$ 6,312$ 14,369$ 19,369$ BV of Equity 47,178$ 74,572$ 121,750$ 121,750$ ROE 17.08% 8.46% 11.80% 16.91%Dividends 3,955$ 4,617$ 8,573$ 8,573$ Payout Ratio 49.09% 73.15% 59.66% 44.26%Retention Ratio 50.91% 26.85% 40.34% 55.74%Expected growth 8.69% 2.27% 4.76% 9.42%

Growth Period 5 5 5 6

Beta 0.85 1.00 0.94 0.93Risk Premium 8.50% 8.50% 8.50% 8.50%MV of Equity (bil) 116.6 760.6Cost of Equity 11.73% 13.00% 12.51% 12.37%

Beta - stable 0.85 1.00 0.93 0.93Growth-stable 6.00% 2.00% 4.00% 4.00%Payout-stable 64.87% 76.37% 66.11% 76.34%

DDM 101,102$ 44,048$ 115,482$ 202,895$ DDM/share 33.70$ 22.02$

Page 8: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Exchange Ratio

S A 3,308,961S B 2,158,855E A 5,935,400E B 495,900PE AB 15.862P A 28.452EPS A 1.794

ER A 0.128

ER A = -(S A /S B ) + [(E A +E B) PE AB] / P A S B

• Exchange ratio assumptions:- S A or S B is the # of shares outstanding on 30 September 2008- E A or E B is the 10-year average of historical earnings- PE AB is PE multiple = P A / EPS A, assuming P Ab = P A and EPS AB = EPS A

- P A is the average of monthly share prices before September 2008- EPS A is earnings per share = E A / S A

Page 9: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Accretion/Dilution AnalysisPre-Deal Facts on September 30, 2008

Wells Fargo Wachovia# of Shares outstanding 3,308,961 2,158,855Market price $37.53 $3.5Pro-forma earnings $4,362,000

Exchange ratio 0.1281 0.1991

Implied Wachovia price $4.806 $7.472

Premium/(Discount) 0.373 1.135

# of new shares 276,462.20 429,828.03

Total # of shares 3,585,423.20 3,738,789.03

EPS after merger 1.217 1.167

Wells Fargo EPS before merger 1.629 1.629

Wells Fargo PE 23.044 23.044

Expected new Wells Fargo price $28.035 $26.89

Accretion/(Dilution) $(9.495) $(10.645)

Page 10: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Ethics

Page 11: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Unethical or Unintentional?

2. The regulators informed Wachovia on 26th Sept that it would be shut down if it were not acquired. At the time of the show (15th Sept), Bob Steel may not have been under the same pressure to sell Wachovia’s shares.

Did Bob Steel intentionally mislead the market to avoid negative reactions?

• There are some evidence which suggests his misleading statements were unintentional:

1. Steel personally held Wachovia’s shares and did not hedge against the fall in price.

Page 12: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Unethical or Fair Play?

29t

h 30t

h 1st and 2nd

3rd

Citigroup agrees to buy Wachovia, exclusivity signed

Wells Fargo became interested in Wachovia again

Wells proposed new deal and Wachovia accepted, new legislation passed (see below)

Wells and Wachovia announced merger

$1.85

$3.50

$3.91

$6.39

Wachovia’s share price (closing)

Page 13: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Minute-by-Minute Stock Price

Page 14: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Post-acquisition Performance

• “Wells Fargo's acquisition of Wachovia late last year helped the bank generate a surprisingly healthy $3 billion in earnings for the first quarter.”

-Wells Fargo CFO Howard Atkins told CNBC (2009)

• "It was a very good decision by Wells Fargo. Wachovia could not have survive on its own. They had a run on deposits.“

-Banking Industry Consultant Ken Thomas (2009)

3/10

/200

8

23/0

1/20

09

15/0

5/20

09

4/09

/200

9

25/1

2/20

09

16/0

4/20

10

6/08

/201

0

26/1

1/20

10

18/0

3/20

11

8/07

/201

1

28/1

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17/0

2/20

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8/06

/201

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28/0

9/20

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18/0

1/20

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10/0

5/20

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30/0

8/20

130

20

40

Wells Fargo Monthly Share Price

Open Share Price

Date

Share

Pri

ce U

SD

Page 15: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Conclusion

• Positive synergy results from the merger• Absent synergies, proposed exchange

ratio is dilutive• Synergies cause a positive impact on EPS• Ethics of negotiation is debatable• Performance after acquisition shows the

merger decision was the right one

Page 16: Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon

Thank you