New York, NY – Recently, Integrity has been writing about the various factors which could prompt a consolidation trend among middle tier financial services firms, including the introduction of CSAs and CCAs, and the decision by many buy-side firms to shorten their list of executing brokers. In fact, over the past few months M&A activity of small and middle tier brokers and investment banks has heated up as smaller brokers have realized that remaining a boutique would be difficult in this environment. Yesterday, one of the biggest deals so far this year in this space was announced with Wachovia’s $6.8 billion deal to purchase A.G. Edwards.
Of course, Wachovia’s purchase of A.G. Edwards was not a deal caused primarily by lost equities trading revenue. Rather the marriage between Wachovia and A.G. Edwards was caused by the realization that economies of scale, a broader product line, and a global platform were becoming increasingly important to win and keep lucrative corporate, buy-side, and high net worth clients.
Apparently, A.G. Edwards realized that it did not have the capital base on its own to be able to compete in a marketplace where a broad product line and a global platform have increasingly become critical to success.
The combined financial services firm is expected to hold more than $1.1 trillion in assets and just short of 15,000 advisers and/or retail brokers — making it the second largest retail stock broker next to Merrill Lynch.
Of course, this deal will not be an easy integration as Wachovia expects to reduce the combined workforce by about 25% (approximately 4,000 employees) and close about 230 branches over the next few years. In addition, some A.G. Edwards groups will be completely shuttered, including investment banking, equity research, and equity sales and trading.
One of the biggest risks associated with this deal will be Wachovia’s ability to keep top producing brokers, as these types of mergers often create significant turnover. Wachovia has announced that it plans to offer large retention packages to good brokers and senior management in an effor to stem the pace of defections.
Wachovia’s offer of stock and cash represents a 16% premium over Wednesday’s closing price. A. G. Edwards sharholders are expected to get 0.9844 Wachovia shares and $35.80 in cash for every A. G. Edwards share they hold.
As mentioned previously, we do not believe that the proliferation of CSAs and CCAs and the shriking of brokerage lists were the primary reason that A.G. Edwards decided to call it quits as a stand alone entity. However, we do believe that various developments, including those discussed above, commission unbundling and disclosure, Reg NMS, the elimination of the Merrill Rule, the increasing sell-side reliance on proprietary trading and prime brokerage, all prompted A.G. Edwards to reevaluate its strategy of how best to serve both its shareholders and clients.
The biggest question we have is, “How many more small and middle tier broker dealers and investment banks will decide that merging their businesses with larger platforms will be the best way to weather these rough seas.”