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Wachovia to Buy Golden West S&L

The $25.5-billion deal would bring an end to one of the last major thrifts in California.

May 08, 2006|E. Scott Reckard | Times Staff Writer

Golden West Financial Corp., one of the last major savings and loans in California, agreed Sunday to be acquired by North Carolina-based Wachovia Corp., the nation's fourth-largest bank, for $25.5 billion in cash and stock.

The acquisition of Oakland-based Golden West, the country's second-largest S&L, would add more than 280 branches in 10 states and give Wachovia a much larger presence in the West.

Golden West shareholders would receive 1.051 Wachovia shares and $18.65 in cash, or $81.07 a share, the companies said. That would be a 15% premium over Golden West's Friday closing price of $70.51.

If approved by shareholders and regulators, the deal would bring an end to a legendary California business, founded and still run by Marion O. Sandler and husband Herbert M. Sandler.

Under the Sandlers' leadership, the S&L survived soaring interest rates that bankrupted many thrifts in the early 1980s, investment scandals that sent some S&L owners to prison later that decade and the long recession and real estate crash of the early 1990s. The bank also outlasted a consolidation wave in which major competitors became parts of Seattle-based Washington Mutual Inc. and New York's Citigroup Inc.

"Wachovia is the company we selected to entrust with our legacy as one of the nation's most admired and trusted financial institutions," said Herbert Sandler in a statement.

Said Wachovia Chief Executive Ken Thompson in a statement, "We believe this combination of our two companies ... will generate superior long-term growth in earnings per share."

Thompson said Golden West would contribute to earnings per share by the end of the second year after the deal, excluding merger costs and amortization of intangible assets. The deal is expected to close in the fourth quarter.

Golden West is best known as an adjustable-rate-mortgage lender, with operations in 39 states. Its World Savings Bank has more than 280 branches in 10 states.

Burned by rising rates in the '80s, Golden West and smaller S&L survivors, including Newport Beach's Downey Financial Corp. and Santa Monica's FirstFed Financial Corp., specialized in adjustable-rate mortgages to keep from being stuck with permanently low-earning loans should rates rise again. These loans often give borrowers the option of paying less than the full interest due during the early years of the loan -- a flexible feature that many other lenders have offered in recent years as home prices have soared.

These so-called pay-option ARMs have attracted the scrutiny of bank regulators in the last year. They have expressed concern that some borrowers might not understand how high payments could rise once the loans are adjusted to full payments.

In a recent interview with the Los Angeles Times, Herbert Sandler said Golden West has always made sure borrowers could afford the full payments and had enough home equity to protect the thrift should they default.

For years, Golden West had been regarded as an unlikely takeover target because the Sandlers have run it so efficiently. But Wachovia, as a full-service commercial bank, would be able to use Golden West's extensive retail network to offer customers a far broader range of financial services.

By buying Golden West, Wachovia, which does business mostly in the southern and eastern U.S., would also boost its presence in the West. Wachovia entered the California banking market in March, when it bought Westcorp Inc. of Irvine and its WFS Financial Inc. unit.

Richard X. Bove, an analyst for Punk, Ziegel & Co., said the deal would allow Wachovia "to achieve a 20-year goal of penetrating the West Coast with a sizable presence" and would create little or no immediate dilution for existing stockholders.

The risk to Wachovia comes if the housing market suffers a crash. That may be why the Sandlers chose to sell their thrift now, he said.

"The mortgage business is weakening across the country. I think the California housing market is due for a crash -- prices could drop at least 20% and housing starts fall by 30%. And their mortgage portfolio is characterized by these untraditional loans -- these payment-option ARMs, and interest-only mortgages."

What's more, Bove said, Golden West is a heavy borrower from the San Francisco Home Loan Bank. Bove said that bank was likely to curtail lending because of proposals that would restrict the federal housing-finance system.

"So the deal could be problematic, and we'll just have to wait and see if in fact the housing market in California does blow up before we know if Wachovia is overpaying."

*

Times staff writer Abigail Goldman contributed to this report, and Reuters was used in compiling it.

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