Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon
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Transcript of Wachovia wells fargo presentation Jian Arthur Guan, Jan Lam Wong, and Tip Piumsomboon
WACHOVIA-WELLS FARGO- CITIGROUP
Presenters: Arthur, Jan, Tip
Outline
• Synergy Calculations• Simple (operational and financial)• DDM (theoretical)• Exchange ratio
• Ethics• Post-merger performance• Conclusion
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
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
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
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: $5 billion p.a.• Estimated increase in ROE accruing from
merger: 1% • Estimates increase in the length of high
growth period: 1 year
Synergy Calculation
Value of Synergy based upon these inputs cost savings 5000 bil p.a. ROE by 1% and 1 yr more RGP 87,413$ 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$
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
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)
Ethics
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.
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)
Minute-by-Minute Stock Price
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
0/20
11
17/0
2/20
12
8/06
/201
2
28/0
9/20
12
18/0
1/20
13
10/0
5/20
13
30/0
8/20
130
20
40
Wells Fargo Monthly Share Price
Open Share Price
Date
Share
Pri
ce U
SD
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
Thank you