Why Wells Fargo bought Wachovia… and not WaMu
A few weeks ago, when we were still on the other side of the financial looking glass, the business media reported that Wells Fargo was among Washington Mutual’s many suitors. A friend who held some WF shares asked me if I thought the deal would happen. I’ve been wrong about a lot in my lifetime, but I was pretty certain that Wells would spurn WaMu. In fact, I was shocked that such a potential deal was even mentioned anywhere!
I worked at Wells Fargo from 2001-2007, and I came to admire the core values of the company’s management. What Wells embodies perhaps more soundly than any company in America is a commitment to its basic strategy. “Be the best at a few important things. Develop, reward, and recognize your employees. Manage risk. Commit resources to the fastest growing markets. Don’t get distracted. And only buy assets when they’re smart and cheap.” So while JP Morgan Chase was buying Chase and Bank One, and WaMu was swallowing Dime and Providian, Wells Fargo was gobbling up smaller banks within its footprint.
Is it any wonder Warren Buffett is Wells Fargo’s top shareholder?
It was thus quite shocking to read the potential for a WaMu deal. What would Wells possibly do with WaMu? WaMu was utterly incompatible with Wells Fargo in every way, from product set to geography to brand to sales culture.
Wachovia, however… Wachovia was Wells-like in several ways, with a strong product set, an emphasis on banker training and development, and a powerful retail presence. In the few markets where Wells and Wachovia overlapped, Wachovia demonstrated an uncanny commitment to customer service, as well as a tendency to buy a lot of brand advertising (unlike Wells)
I worked on Wells Fargo’s competitive response to Wachovia’s 2006 entry into California, when they bought Golden West. Wachovia’s purchase of Golden West was exactly the kind of deal that Wells Fargo wasn’t doing — paying a fat premium just to get into a new market. Golden West, operating as World Savings Bank, basically offered two products — high-end CDs and California mortgages. It was a funny little bank, started by a married couple in the East Bay and rapidly expanded across California’s fast-growing housing markets. Wachovia’s primary goal in buying their branches was to establish a west coast presence for the first time. But how could Wachovia possibly make Golden West’s financial and people assets fit?
And then — BOOM! — subprime bomb goes off, and Golden West becomes a money pit. Wells Fargo, which had eschewed some the easy profits of the housing bubble in the name of managing risk, suddenly looks the smart rich guy in the room. Unlike WaMu, with its free checking and shoddy lending, Wachovia looks like the right cultural fit for Wells Fargo. And now Wells Fargo gets to become a national bank for less than $12 billion.
This is Wells Fargo’s masterstroke. While big competitors were getting bigger by buying their competitors at high prices, and then putting all their efforts into digesting their new assets instead of improving their core offerings, Wells Fargo built a powerful cross-sell culture, did small deals, and waited for the right moment.
Now if you’ll excuse me, I need to go buy some stocks in my IRA. I have a feeling that in 2018, I’ll be glad I did.