Tuesday, June 05, 2007

Wachovia's ambitious CEO is in control

Wachovia's 2006 annual report arrived several months ago. It was a startling document, and not because of any of the numbers or words in the report. In the opening sections there was only one photograph of an individual. It was a full page studio head shot of Kennedy Thompson, the CEO. There were no photographs of any other employee or any customer. There is no doubt in most companies that the CEO is in full control, but this was a stunning bit of hubris.

In a large corporation the decision to do this is troubling on several fronts. First, it speaks to the absolute control that Thompson has and the sycophant system that must surround him. It is likely that the Wachovia bureaucracy and their consultants brought this recommendation to Thompson during the lengthy process of planning an annual report. It is unlikely that anyone dared raise the issue of the message that this would send or the missed opportunity that it represents considering the benefits of sharing the spotlight with employees or customers. Second, it is certain that the guy liked the idea, whether he feigned a questionable posture or not, because it would not be there without his unequivocal support. King Kennedy. Third, it does a lot to explain recent expansion actions by Wachovia and the willingness to risk shareholder value for an ambitious personal agenda. But hey, at least it's fair warning to investors who choose to pay attention and who don't believe in Thompson's infallibility.

The most recent large acquisitions are certainly red flags. Last year Wachovia acquired the large thrift Golden West at what can safely now be called the top of the mortgage market. Within a week of that acquisition Wachovia's stock price was down 10% and in the last 12 months the stock has not recovered that loss. Golden West was a fine company with unique management and a strong culture but the price paid was deemed by the market to be too high, and the possibility of not being able to sustain the uniqueness of Golden West's business model within the much larger Wachovia is a question, in fact it's almost impossible one could think. Last week Wachovia agreed to purchase the large regional brokerage firm A.G. Edwards and it's the same m.o. Wachovia stock is down 4% since the announcement. More importantly they are again buying a firm with a very strong culture and a relatively unique business model that will be difficult to maintain, and they may be buying at a market top, maybe not, but they are absolutely buying at a point when the old brokerage model continues to decline, and that will even happen in the traditional midwest markets. In fact, this acquisition will likely lead customers to reexamine the value of their Edwards relationship versus the cost and value of one with E-Trade, Schwab, or Fidelity.

These acquisitions have a manifest destiny approach to them. They may work in the long term strategically, but in the medium term their diminution of shareholder value due to price and integration risk is substantial. Another North Carolinian CEO acquired JPMorgan in 2001 as a strategic coup and the share price of the new JPM is still below the price at acquisition 6 years ago. There may be lesson there.

Wachovia has a good list of top shareholders, a decent dividend, is viewed as low risk and has 8 buy recommendations out of approximately 2o securities analysts that publish on the stock. Sounds good, but watch out for the CEO that enjoys his portrait before retirement.


Anonymous Julie said...

Dear J.B.,

I don't travel in circles like these and have no idea about potential impacts on investments, etc. but found your introduction re: hubris interesting, very much so. It reminded me of this intriguing post by a writer who may intrigue you (he does me).


Yours in the sunny South,

11:37 PM  

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