Golden West Deal Follows Takeover Trend

Wachovia Corp.’s $24.2-billion purchase of Oakland’s Golden West Financial Corp. is the latest in a string of California acquisitions by big banks hoping to tap into the state’s growing population and vibrant entrepreneurial economy.

Wells Fargo & Co.’s stagecoach dates to the Gold Rush era, but the San Francisco bank has been driven by executives from the Midwest since 1998, when Minneapolis-based Norwest Corp. took it over, keeping the iconic name and logo.

Bank of America also grew from its San Francisco base until a takeover by North Carolina’s NationsBank in 1998. The new management kept the name but set up the merged bank’s headquarters in Charlotte, N.C., where Wachovia also is based.

Los Angeles-based First Interstate Bancorp and Security Pacific Corp. had merged into Wells and BofA before they were taken over. Many of what were once the nation’s largest S&Ls;, including Home Savings, Great Western, American Savings, California Federal and Glendale Federal -- have long since become part of New York’s Citigroup Inc. and Seattle’s Washington Mutual Inc.

Even having the word California in its name is no longer a reliable guide to a bank’s DNA. Union Bank of California is majority owned by a Japanese bank. California Bank & Trust is part of Zions Bancorp in Utah. And Bank of the West, symbolized by a bear as on the state flag, is a wholly owned subsidiary of a French company.

Analysts say the takeover trend was set off largely by the early-1990s recession, which began later in California than elsewhere and took years longer to end. Out-of-state banks, recovering earlier, found themselves in a stronger position to move in on banks and thrifts wounded by California’s economic calamity.

Golden West Financial, the parent company of World Savings, was an exception. Its care in writing mortgages was so great that even in 1994, after the recession had socked California with a double-digit unemployment rate and home prices had fallen about 20%, the thrift wrote off only a tiny fraction of its loan portfolio as uncollectible.

Instead of being sold, it survived and thrived as a remnant of an earlier era, offering certificates of deposit to savers and mortgages to borrowers.

The problem, according to company co-Chief Executive Herbert M. Sandler, was that Golden West had only one loan product -- adjustable-rate mortgages.

Its sale comes as the home loan market turns down amid rising interest rates. But the motivation in selling was not so much to bail out before the business got tough, Sandler said, as it was to acknowledge that the thrift’s single focus couldn’t last forever.

“You can only go so far as a one-line company,” Sandler told analysts Monday, when the deal was formally announced.

In selling to Wachovia, a full-service bank with high marks for customer service, “we found a partner that was a perfect cultural fit” in terms of focus on integrity and attention to the needs of customers, employees and shareholders, he said.

Sandler, 74, bought Golden West with wife Marion O. Sandler, 75, in 1963. He said the sale to Wachovia would be the state’s gain by bringing “a great American corporation to California.”

Wachovia Chief Executive G. Kennedy Thompson, who had long sought to expand into California and the West, said he was surprised and thrilled when Golden West made overtures for a deal.

The thrift’s 285 branches in 10 states offer the North Carolina bank a one-of-a-kind opportunity to sell its many additional services to individuals and small businesses across the West.

Thompson noted that a University of Michigan survey had ranked Wachovia first in customer relations for five years running, “a service level well above Bank of America and Wells Fargo.”

He said the deal would begin adding to Wachovia’s per-share earnings in 2008, but many on Wall Street found the deal overpriced.

Wachovia shares fell $3.97 to $55.42 on Monday, a 6.7% decline. The value of the deal was originally reported at $25.5 billion, but the stock slip lowers its value to $24.2 billion. Golden West shareholders will get 1.051 Wachovia shares and $18.65 in cash for each of their shares.

Golden West rose $4.39, or 6.2%, to $74.90, and shares of other California thrifts specializing in adjustable-rate mortgages also rose.

Newport Beach-based Downey Financial Corp. jumped $4.02 to $75.56 and FirstFed Financial Corp. of Santa Monica climbed $1.80 to $65.30.

The allure of California can be explained by a few facts, said Edward Carpenter, an Irvine bank consultant who has done studies for Golden West and Wachovia but no longer has them as clients. California has more deposits in branches than any other market, but its banks pay 0.43 percentage point less in interest on the deposits than the national average, he said.

And Carpenter noted that 20% of the nation’s population growth is in the state.

Because the state’s economy is dominated by smaller companies, it’s also easier for a bank to attract new and growing businesses, said John M. Eggemeyer III, a bank buyout expert whose company, Castle Creek Capital, owns several smaller banks, including Pacific Western National Bank in Santa Monica.

Joseph Morford, a bank analyst with RBC Capital Markets in San Francisco, noted that many of the remaining independent banks in the state are themselves acquirers of other companies.

An example is City National Corp. in Beverly Hills, which caters to just the kind of small business that Eggemeyer says makes perfect new customers.

All this makes the acquisition of Golden West a not-to-beduplicated deal, Carpenter said.

“The fact is, the level of merger activity is less in California than throughout the rest of the country,” he said. “And the reason is this: There simply isn’t anything else of that size left to buy.”

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Bigger vault

With its acquisition of Golden West Financial, Wachovia would boost its assets to $669 billion.

(In trillions)

Citigroup: $1.59

Bank of America: $1.42

JPMorgan Chase: $1.27

Wachovia: $0.54

Wells Fargo: $0.49

Washington Mutual: $0.35

Sources: Company reports