Chief executives at L.A.’s biggest savings and loans might be feeling more secure about their future these days, ever since Washington Mutual Inc. agreed to pay a premium price to acquire Great Western Financial Corp. of Chatsworth.
The $7.8 billion deal will be the biggest and priciest U.S. thrift acquisition in history, leading analysts to predict a cooling off for similar acquisitions over the next six to nine months.
Washington Mutual and Great Western approved their merger June 13, in a deal that will add Great Western’s $42.9 billion in assets to Washington Mutual’s $44.6 billion to create the nation’s largest thrift.
In the process, Washington Mutual will pay Great Western shareholders 3.7 times Great Western’s book value for their stock. (Book value is a company’s net assets minus its net liabilities.)
Prior to the Great Western deal, the rash of thrift acquisitions sweeping the nation was occurring at multiples closer to 1.5 times book value. Even the sale of California Federal Bank to First Nationwide Holdings earlier this year considered pricey at the time was for only 1.7 times book value.
“These are what are known as nosebleed prices,” said Gareth Plank, an analyst at UBS Securities. “I didn’t think anybody would pay more than two-and-a-half times book, and I was wrong, wrong, wrong.”
Indeed, the high price of Great Western could scare out-of-state financial institutions particularly banks from pursuing any L.A.-area thrifts until next year, said Joe Morford, an analyst at Alex. Brown & Sons.
“I think (the premium paid by Washington Mutual) will make it more difficult for buyers and sellers to come to terms,” he said. “And when (the acquisition flurry) does resume, I definitely expect multiples to be below three times book value.”
In an interview at Great Western’s Chatsworth headquarters last week, Washington Mutual Chief Executive Kerry Killinger said the purchase of Great Western was a good deal, despite the high price, because it offers a unique opportunity to expand Washington Mutual’s presence in Southern California.
“We’re comfortable at the price we paid because we can get the cost savings and the revenue enhancements” that will lead to projected earnings growth, he said.
Apart from Washington Mutual, the three banks most often cited as interested in buying a Southern California thrift are NationsBank of Charlotte, N.C.; Banc One Corp. of Columbus, Ohio; and Norwest Corp. of Minneapolis.
Officials from all three banks declined to comment on how the high price of Great Western might affect their acquisition plans.
However, Banc One spokesman John Russell said expensive acquisitions like the Great Western deal would probably be unacceptable to Banc One because they could overly dilute Banc One’s stock value.
“Our stated objective when we’re looking at (potential acquisitions) is we will not take dilution in a transaction,” he said. I would assume 3.7 times (book value) would have been dilutive to us, and we won’t do a transaction that is dilutive.”